3 Great Income Stocks That Retirees Should Love

Most Americans don't have to wait until they're retired to know that Social Security benefits won't be enough to maintain their current lifestyle. If they pay any attention to retirement planning advice, they know they will need other sources of income as well. Investing in dividend stocks is one great way to generate additional income.

Three Fool.com contributors were asked to discuss some great income stocks that they think retirees should love. They picked AbbVie (ABBV -0.56%), Johnson & Johnson (JNJ -0.83%), and Pfizer (PFE 1.91%). Here's why.

A new era, but the same great dividend

Keith Speights (AbbVie): There's no question that AbbVie is entering into a new era in its history. The big drugmaker can no longer depend on Humira to generate solid growth. Sales are declining for the blockbuster autoimmune-disease drug as it faces competition from biosimilars.

However, one important thing hasn't changed for AbbVie in this new era: The company still offers a very attractive dividend. AbbVie is a Dividend King with 51 consecutive years of dividend increases (41 of those years the dividend came from its being part of parent company Abbott Laboratories). Its dividend yield currently tops 4%.

AbbVie should remain a great pick for retirees, even with Humira's challenges. The company has built a solid product lineup in recent years in anticipation of Humira losing exclusivity. Two newer drugs, Rinvoq and Skyrizi, are projected to offset the sales decline for Humira by themselves. The company has other drugs in the approval pipeline as well.

Granted, AbbVie's revenue and earnings will slump temporarily. But the drugmaker fully expects to return to growth beginning in 2025. It also should be in a good position to keep its streak of dividend increases going for years to come.

An ideal income stock for retirees

David Jagielski (Johnson & Johnson): For retirees, an income stock that can make for a sound investment is one that isn't volatile and that can be counted on for a dividend. Johnson & Johnson is a stock that ticks off those boxes, and as a bonus, it also has a great track record for increasing its payouts. Last month, the company announced its 61st consecutive year of dividend increases. The Dividend King is among the safest dividend growth stocks you can find on the markets today.

At 2.9%, retirees can earn a decent payout from investing in Johnson & Johnson. On a $50,000 investment, for example, it could generate $1,450 in annual dividends. If you can invest $100,000 into the stock, the annual dividend comes in at $2,900.

Plus, if the company increases its dividend payments by 5% or more as it has been doing in recent years, after five years your dividend could be 28% higher than it is now. That means that $2,900 annual dividend could grow to over $3,700.

What's particularly attractive for retirees is that this is also a low-volatility stock. That means it doesn't have big swings in value, even though the markets might. Johnson & Johnson stock has a beta value of around 0.5. A beta value of 1 indicates that a stock moves similarly to the markets. The lower the beta value, the less volatile the stock has been.

And mind you, this is even as Johnson & Johnson has been involved with many legal battles, including its talc lawsuits. That's because while it may end up costing the company $8.9 billion in today's dollars to settle those lawsuits, Johnson & Johnson generates double that in operating cash flow every year. The company's business is in solid shape and well-equipped to handle just about any adversity that may come its way.

J&J spun off its consumer health business this week into a new company called Kenvue (KVUE 1.43%) and becoming less diversified in the process, that's likely to be a net positive for investors as well. J&J made the move so it can focus on its faster-growing segments: medical devices and pharmaceuticals.

Strong financials, a growing dividend, and a fairly stable stock are reasons why Johnson & Johnson can be a great income investment for retirees to buy and hold.

More than just passive income

Prosper Junior Bakiny (Pfizer): Retirees tend to be attracted to reliable, dividend-paying companies that generate solid profits and raise their payouts regularly. Pharmaceutical giant Pfizer fits that description well. The company has a vast, diversified portfolio of medicines across various therapeutic areas, including oncology, immunology, and infectious disease. Pfizer is, of course, a leader in the COVID-19 space. 

The steep decline in demand for coronavirus products this year will lead to an equally significant drop in year-over-year revenue for the company. However, Pfizer's lineup is growing, partly thanks to acquisitions. But there will also be plenty of new approvals over the next year, leading to a rejuvenated portfolio for the company. The result will be stronger revenue and earnings growth, especially once comparisons to the worst of the pandemic years cease.

Pfizer is unlikely to suspend or cut its dividend, even during the initial decline in revenue it will encounter this year. It generated more than enough cash flow in the past couple of years to sustain payout increases, despite less impressive financial results incoming this year.

Pfizer grew its dividend by a respectable 20.6% in the past five years. Its cash payout ratio is just 34.5% -- a low enough number for the company to afford many more hikes. That should appeal to dividend investors, particularly retirees.

The company's stock price is down by 25% this year as many investors headed for the exits due to the perceived end of its coronavirus-related tailwind. That arguably creates an excellent entry point for investors. Those who buy Pfizer's shares now and hold them for a while will eventually be rewarded with strong top- and bottom-line growth and dividend increases.