Roughly 64 million Americans who receive Social Security benefits will see their distributions increase by 5.9% this year as an adjustment to meet cost of living increases. If you've been paying attention to inflation news, it might sting knowing the benefit increase is coming in significantly below this year's rate of inflation.
In addition to the possibility that subsequent cost of living adjustments (COLAs) will fail to keep pace with shifts in the dollar's purchasing power, the Social Security Administration also acknowledges that the program's trust fund reserves will be depleted roughly 15 years from now unless Congress takes action. Even assuming the Social Security program is fixed and COLAs keep pace with inflation, owning a portfolio of income-generating investments could help you shore up your retirement. And with the stock market seeing big sell-offs this year, long-term investors have an opportunity to invest in top dividend stocks at reasonable prices.
Read on to see why a panel of Motley Fool contributors thinks buying these income-generating stocks would be a smart move.
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Bank dependable income with this new Dividend King
Keith Noonan (PepsiCo): With its strong core business and returned-income profile, PepsiCo (PEP 3.62%) stock has long been a favorite among dividend investors. The company has a fantastic collection of billion-dollar snack and beverage brands, and its scale and distribution advantages should allow the business to post a solid performance regardless of macroeconomic cycles and industry shifts.
While demand for soda has been declining in recent years, PepsiCo has been successfully diversifying its beverage products and branching into new categories, and the company's recently published second-quarter results were very encouraging. Despite the challenging macroeconomic backdrop, sales increased more than 5% year over year in the second quarter. Meanwhile, revenue excluding recent acquisitions was up 13% compared to the prior-year period.
The consumer-goods giant has now increased its annual payout for 50 years running, putting it in the illustrious ranks of the Dividend Kings, and it looks like Pepsi is in good shape to continue delivering dividend growth. This is a relatively low-risk stock with a great dividend profile, and it stands out as a worthwhile addition for investors seeking companies fit for a retirement-oriented portfolio. The stock's yield currently sits at a solid 2.7%, and it's backed by a well-managed business that makes shares a set-it-and-forget-it investment.
When viewed in the context of a roughly 15% drop for the S&P 500 across this year's trading, PepsiCo's dividend-adjusted decline of less than 2% speaks to the stock's defensive fortitude, and it continues to stand out as a top stock for retirement portfolios.
Pull this overseas "lever"
James Brumley (Unilever): I know it's a bit off the beaten path, but I like Unilever (UL 0.19%) not just as a dividend payer you can depend on but as a stock that holds up relatively well even in a bearish environment.
Yes, Procter & Gamble (PG 0.68%) is the typical go-to name in the consumer goods space. It's got a great pedigree, and perhaps more importantly to most U.S. investors, it's a domestic name people are more familiar with. While Unilever brands like Ben & Jerry's, Vaseline, and Hellman's can be found in the United States, a sizable chunk of the company's business is done overseas. That's ultimately a good thing for anyone looking to sidestep marketwide trouble. It seems like bear markets and recessions tend to be a little more intense within the U.S. than they are elsewhere.
At the same time, an investment in overseas businesses can mute some of the currency-related volatility many investors suffer when most of their stocks are U.S. dollar-denominated.
Other benefits of owning Unilever are the company's dividend history and the current yield. While it's not a Dividend Aristocrat, Unilever hasn't failed to pay a quarterly dividend since 2009 or a half-year dividend since 1999. And these payouts have steadily grown the whole time, with the current quarterly payout rate more than 80% above where it was ten years ago.
Given this history, I'm surprised you can still step into a yield of 4.1%. I'm not going to complain though.
The arteries of the U.S. energy sector
Daniel Foelber (Kinder Morgan): Dividend investors know that a 3% yield backed by a reliable company is the sweet spot for passive income. However, there are a few companies that fetch even higher yields without sacrificing reliability.
One top stock is energy infrastructure giant Kinder Morgan (KMI 0.27%). Kinder Morgan operates one of the largest networks of natural gas, oil, and carbon dioxide transportation and storage. Kinder Morgan is a midstream company in the business of transporting fuels for its customers, not producing or refining hydrocarbons. This business model leaves less room for growth but instead generates reliable cash flows thanks to long-term fixed-fee or take-or-pay contracts. This makes midstream companies far less cyclical based on oil and gas prices than producers or refiners. The dynamic was put on display during the oil and gas crash of 2020 when midstream companies fared far better than upstream or downstream firms or even the integrated majors like ExxonMobil or Chevron.
Kinder Morgan's high cash flow supports its dividend, which has a yield of 6.4% at the time of this writing. Investors shouldn't expect Kinder Morgan to be a high-growth name or even outperform the broader stock market. Rather, the ideal Kinder Morgan investor is someone looking for income and capital preservation. Given the importance of natural gas in the U.S. economy and the growing demand for international exports, Kinder Morgan stands out as one of the best passive income machines to buy now.
