In retirement, dividend-paying stocks offer a level of stability and security that growth stocks do not. That's because companies that consistently pay and raise their dividends typically have established track records, solid financial health, and a commitment to returning capital to shareholders.
Considering these factors, here are three dividend-paying stocks that can reward you during your retirement.
1. Caterpillar
Caterpillar (CAT 1.59%), the world's largest construction equipment manufacturer, has paid a cash dividend every year since the company went public in 1925. And it has raised its dividend annually for 29 consecutive years. Its current quarterly dividend is $1.20 per share, equating to an annual yield of 2.12%.
A key financial metric for a dividend stock is its payout ratio (annual dividend payments divided by annual earnings) to assess a company's long-term dividend sustainability and ability to raise it in the future. A payout ratio above 75% indicates weak or unstable earnings, which pose risks, particularly during unforeseen challenges. With a 35% payout ratio, Caterpillar should have no problem sustaining and raising its dividend annually.
Beyond this impressive streak, it should also continue to benefit from the 2021 Infrastructure Investment and Jobs Act, with $550 billion of new federal spending. Infrastructure spending is starting to translate into serious growth in revenue and net income. For its most recently reported quarter, the company generated $15.9 billion in revenue and a record $4.91 in adjusted profit per share, representing year-over-year growth of 17% and 71%, respectively.
The bear case for Caterpillar is that high interest rates around the globe will result in fewer retail construction projects. This was the case in its first quarter of 2023 versus a year ago.
Nonetheless, the stock seems undervalued compared to its historical price-to-earnings (P/E) ratio, which has averaged around 20 in the past five years. The stock is currently trading at 17.4, suggesting a potential bargain opportunity.
2. Hershey
It's summertime, which means many Americans will soon be enjoying s'mores around a campfire. Hershey (HSY -0.53%), whose candy bars are an essential ingredient in s'mores, has paid a quarterly dividend since 1972.
The chocolate and snack company has raised its quarterly dividend each year except in 2009 during the Great Recession. Its most recent quarterly dividend was $1.036 per share, for an annual yield of 1.62%, and based on history, management should be announcing a dividend increase in July.
Its dividends and stock appreciation have generated a total return of 208% over the past five years, easily outperforming the S&P 500's 68% gain.
The company achieved record quarterly revenue of $3 billion and net income of $587 million for its first quarter, representing a year-over-year increase of 12% and 10.9%, respectively. And management recently raised its 2023 full-year guidance for revenue to grow 8% and earnings per share to increase 15% compared to 2022.
Image source: Getty Images.
As for what could go wrong, Consumer Reports conducted a recent study that revealed elevated levels of lead and cadmium in particular dark-chocolate Hershey bars. The report flagged some other candy makers as well. This alarming assertion has led to at least one lawsuit against Hershey, and the company could potentially encounter further challenges.
Hershey has responded that "food safety is paramount" and the company is looking at what steps it can take to lower levels of these elements. Meanwhile, the diversification of its portfolio into snacks like SkinnyPop and Dot's Homestyle Pretzels over the past few years should help mitigate potential risks to its overall business.
Overall, Hershey is a market-beating stock, and with a payout ratio of 47%, the company should continue paying and raising its dividend for years to come.
3. Lowe's
Most do-it-yourself homeowners are familiar with Lowe's (LOW -0.04%), a leading home improvement retailer in the United States. The stock is one of the most shareholder-friendly on the market, with a streak of paying and increasing its dividend for nearly 49 consecutive years. Today, it pays a quarterly dividend of $1.10 per share, representing a 2.1% dividend yield.
Beyond the dividend, the company is noted for returning capital to shareholders through share repurchases. Over the past five years, it has reduced its share count from 825 million to 596 million. This has effectively increased the ownership stake of the remaining shares by an impressive 38%.
Investors might think Lowe's could face weaker demand due to higher interest rates. But CEO Marvin Ellison has previously said that high interest rates alone don't hurt home improvement if other favorable economic conditions exist.
And with the average American house over 40 years old, many homeowners might not have a choice in home improvement spending.
For dividend seekers, whether or not Lowe's grows net sales significantly shouldn't affect its ability to pay and raise its dividend. That's because by drastically lowering its share count, it has a relatively low payout ratio of 39% despite the long history of annual dividend increases. Therefore, investors should expect it to continue being one of the most shareholder-friendly stocks.
Are these top dividend stock buys?
In an unpredictable market, dividend stocks can be a valuable anchor for your portfolio, providing stability along with regular quarterly payments. These stocks have outstanding track records of growing their dividends and outperforming the broader market, making them excellent additions to any retirement savings.
