In retirement, dividend-paying stocks can be more reliable and secure than growth stocks. This is because companies that regularly pay and increase their dividends usually have a proven history of success, sound financial standing, and a dedication to sharing their profits with shareholders.
Considering these factors, let's explore three dividend-paying stocks that can potentially provide attractive rewards for your retirement years.
1. Jacobs Solutions
Jacobs Solutions (J 0.51%), an engineering services company with a $17 billion market capitalization, pays a quarterly dividend of $0.26 per share, representing an annual dividend yield of 0.8%. Since the company started paying a dividend in early 2017, the stock has generated a total return (stock appreciation plus dividends) of 139%, outperforming the benchmark S&P 500 by roughly 13 percentage points.
J total return level data by YCharts.
The payout ratio is a crucial financial metric for dividend stocks as it helps gauge a company's ability to sustain and increase dividends over the long term. It is calculated by dividing annual dividend payments by yearly earnings. A payout ratio above 75% signals weak or unstable earnings, exposing the dividend to risks, especially during unforeseen challenges. With a payout ratio of 16%, Jacobs is well-equipped to maintain and boost its dividend each year, a trend it has successfully upheld since 2019.
Rising interest rates could create some anxiety around the stock as investors might incorrectly think fewer engineering solutions are needed if there is less demand for building. That's unlikely to bear out for Jacobs since it is one of the companies that should continue to benefit from the recently passed Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the CHIPS Act, with an estimated $2 trillion of new federal spending over the next decade.
For its fiscal third quarter, Jacobs generated a record $4.2 billion in revenue, representing a 7.5% year-over-year increase. But arguably more impressively, management says it has a "near record level" backlog of $28.9 billion, demonstrating the company's many projects in the pipeline for future growth.
Management needs to hit its guidance for fiscal full-year adjusted earnings per share (EPS) of $7.25 to $7.45 after missing analysts' expectations by $0.02 for its most recently reported quarter. Still, as long as the company continues to benefit from government spending at a similar rate, the stock should reach new heights soon.
2. Lowe's
Lowe's Companies (LOW -0.04%), a leading home improvement retailer in the United States, has raised its dividend payout annually for 49 consecutive years. Its quarterly dividend of $1.10 per share represents a 1.9% annual yield with a payout ratio of 39%. And despite management expecting flat sales growth in 2023 compared to 2022, the stock has surged this year, with a total return of 14% year to date.
Besides consistent dividend growth, the company has gained recognition for enhancing shareholder value through share repurchases. Over the last five years, management has effectively decreased outstanding shares from 825 million to 596 million, a reduction of 28%.
Warren Buffett explained in his most recent annual letter to shareholders how share repurchases benefit all owners: "The math isn't complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices."
As a possible consequence of Lowe's strategy to aggressively return capital to its shareholders, the company's debt has grown significantly. Over the past five years, net debt (total debt minus cash and cash equivalents) has skyrocketed 141% from $13.9 billion to $33.6 billion. For comparison, competitor Home Depot, which has a market capitalization of more than double Lowe's, saw its net debt increase 71% from $24 billion to $41 billion over its last five reported years.
Still, Lowe's stock seems undervalued compared to its historical price-to-earnings (P/E) ratio, which has averaged 23.1 in the past five years. The stock currently trades at a forward P/E of 16.7, suggesting a potential bargain opportunity.
Image source: Getty Images.
3. Mastercard
Most investors are likely customers of Mastercard (MA 0.07%), considering the company has issued 3.2 billion cards under its own name and its Maestro brand. The payment-processing and financial-services company has increased its dividend for 11 consecutive years, with a current quarterly payout of $0.57 per share.
While the resulting dividend yield of 0.57% may appear underwhelming, the quarterly dividend was only $0.25 per share in 2018, meaning it has more than doubled in five years. With Mastercard's low payout ratio of 20%, investors should expect management to raise its dividend annually for the foreseeable future.
And Mastercard is similar to Lowe's in its share repurchases, buying back 9% of its outstanding shares over the past five years . The company currently has $6.4 billion remaining in its share repurchasing program after already spending $5.8 billion on buybacks in 2023.
The company generated $6.3 billion in revenue and $2.8 billion in net income for its most recently reported quarter, representing a year-over-year increase of 14% and 25%, respectively. For comparison, its largest competitor, Visa, grew its revenue and net income by 12% and 22%, respectively, for its most recently reported quarter.
When it comes to what could go wrong, both companies face the possibility of increased regulation after a recent $5.6 billion antitrust class-action settlement in which more than 12 million retailers accused the payment giants of improperly fixing fees on credit and debit cards.
Mastercard is at the forefront of the worldwide cashless revolution and one of the entrenched leaders in the payments space. Investors can expect the stock to continue to flourish for years to come.
Are these dividend stocks right for you?
While this group of stocks includes three very different companies operating in different parts of the economy, they are similar in that their management teams are devoted to returning capital to shareholders.
These businesses offer some of the most shareholder-friendly investment opportunities between share repurchases and consistently growing dividends, making them ideal candidates for your retirement portfolio.
