Whether you're a brand-new investor or someone who's put their money to work in the stock market for years or decades, it's been a difficult year. The benchmark S&P 500 and iconic Dow Jones Industrial Average have both endured double-digit declines from their all-time highs, while the tech-heavy Nasdaq Composite has fallen as much as 22% from its November closing high.
Though rapid moves lower in the market can be scary, especially for retirees who fear losing their principal investment, history has shown time and again that these dips are the perfect opportunity for investors to pounce. It's simply a matter of deciphering which investing strategy best fits your needs and goals.
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Why dividend stocks are a smart choice for retirees
For retirees looking for a safe haven during the recent market mayhem, dividend stocks may be the answer.
A study from J.P. Morgan Asset Management, a division of big-bank JPMorgan Chase, shows why dividend stocks are so highly valued on Wall Street. The report compared the performance of publicly traded companies that initiated and grew their payouts over a four-decade period (1972-2012) to stocks that didn't pay a dividend. The performance gap was night and day. Dividend-paying stocks averaged a 9.5% gain annually over 40 years, while non-dividend-paying stocks struggled to a 1.6% average annual gain.
Putting aside the magnitude of this outperformance, this is precisely the outcome we would expect. Because income stocks are often profitable, time-tested, and have transparent long-term outlooks, they're the type of businesses we'd expect to increase in value over time. This makes dividend stocks a particularly smart investment choice for retirees.
If a retiree wants to protect their initial investment while raking in a near-guaranteed payout, the below stocks are three of the safest dividend stocks to buy right now.
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Johnson & Johnson: 2.4% yield
First up is healthcare conglomerate Johnson & Johnson (JNJ 0.67%), which is unquestionably one of the safest income stocks on the planet.
One way to measure the safety of this company's payout is by examining how often J&J increases it. Entering 2022, only nine publicly traded companies had longer consecutive annual streaks of boosting their base annual payouts. In Johnson & Johnson's case, it's expected to increase its base annual payout for a 60th consecutive year in April.
Want more proof that J&J is a rock-solid income stock? Among the thousands of publicly traded companies in the U.S., J&J is one of only two stocks that's been given the highly coveted AAA credit rating from Standard & Poor's (S&P). This AAA rating means S&P has the utmost confidence in the company repaying its debt -- even more so than the U.S. federal government making good on its own debt obligations.
Payout aside, one of the core reasons Johnson & Johnson can be relied on by investors is the defensive nature of healthcare stocks. Since we can't control when we'll get sick or what ailment(s) we'll develop, there will always be pretty consistent demand for prescription drugs, medical devices, and healthcare products and services.
The other key piece of the puzzle for J&J is that its three operating segments each serve a purpose. For instance, consumer health might be the slowest growing but provides highly predictable cash flow and strong pricing power. Though medical devices might be growing slower than investors would like, the segment is perfectly positioned to take advantage of an aging boomer population. Lastly, pharmaceuticals have a finite period of exclusivity but offer fast growth and juicy margins. Each of these segments counter what the others lack to create a highly profitable healthcare powerhouse.
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Enterprise Products Partners: 7.6% yield
Yes, high-yield and ultra-high-yield dividend payers can be among the safest stocks for retirees. That's why oil and gas company Enterprise Products Partners (EPD 0.18%) easily makes the cut.
You might be scratching your head and wondering how an oil stock could be considered even remotely safe after what happened in 2020. While the historic crude oil demand drawdown did wreak havoc on upstream players (i.e., drilling and exploring companies), it had minimal to no operating impact on midstream providers like Enterprise Products Partners.
A midstream oil company is the middleman of the energy space. In Enterprise Products' case, it provides around 50,000 miles of transmission pipeline, 14 billion cubic feet of natural gas storage capacity, and 20 natural gas processing facilities. The contracts it's able to negotiate with the upstream side of the energy complex tend to lock in volume and price commitments. This means little or no surprises for Enterprise Products Partners and highly predictable cash flow.
The importance of these commitments can be seen in the company's distribution coverage ratio, which measures the amount of distributable cash flow relative to what's actually paid to shareholders. A distribution coverage ratio below 1 would imply an unsustainable payout.
In Enterprise Products Partners' case, its ratio never dipped below 1.6, even when crude oil futures briefly turned negative in April 2020. At no point has the company's payout been in doubt, as evidenced by its 23-year streak of increasing its base annual dividend.
Now that oil and gas prices are hitting multiyear or multidecade highs, the company can probably expect an increase in volume commitments for future years. In other words, it's business as usual for what may well be the most rock-solid income stock in the entire energy sector.
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Verizon Communications: 5% yield
A third exceptionally safe dividend stock retirees can buy right now is telecom giant Verizon (VZ 0.88%).
"Safe" is obviously a relative term, but Verizon offers one of the lowest betas among large-cap companies. Beta is a measure of volatility relative to the S&P 500. With a five-year monthly beta of 0.38, Verizon is only 38% as volatile as the S&P 500. If, for example, the S&P 500 were to decline by 10%, we'd only expect Verizon to fall by 3.8% (assuming it stuck to its five-year monthly average).
Even though it's a fairly slow-growing company these days, Verizon has two organic growth catalysts that can move the needle over the next three to five years. To begin with, it should notably benefit from the rollout of 5G wireless infrastructure.
It's been about a decade since wireless download speeds were meaningfully improved. Upgrading wireless infrastructure won't be cheap or happen overnight but should lead to a persistent device-replacement cycle and higher data consumption over time. Since data is what generates Verizon's juiciest margins, 5G is the shot in the arm of organic growth investors have been waiting for.
Something else to consider is that wireless access has practically evolved into a basic necessity for most consumers. No matter how high inflation flies or how poorly the U.S. economy performs, consumers and businesses aren't giving up their smartphones and wireless devices.
Second, the company has been aggressively gobbling up 5G mid-band spectrum. The purpose is to target 5G at-home broadband services and sign up 30 million households by the end of 2023. Broadband may not be the growth story it was in the 2000s, but it's still a steady producer of high-margin operating cash flow.
Verizon shows that boring can be beautiful for retirees seeking steady income.
