For investors saving for or living in retirement, dividend paying stocks have a lot going for them. While you're building your nest egg, the cash those dividends generate can be reinvested in new opportunities to help drive potential long-term growth. Once you're retired, those cash flows can help support more immediate needs.
With that in mind, three Motley Fool contributors went searching for strong dividend paying stocks that they'd be willing to hold while building retirement-focused accounts. They picked Bank of America (BAC -0.21%), Realty Income (O -0.17%), and Texas Instruments (TXN 1.27%). Read on to find out why, and decide for yourself whether one or more of them may deserve a spot in your long-term portfolio.
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Bank on this cheap giant
Jason Hall (Bank of America): Over the past two years, interest rates have skyrocketed from near-zero to levels we haven't seen in more than two decades.
Target Federal Funds Rate Upper Limit data by YCharts
As a result, mortgage activity has ground to a halt, and banks have pulled back on higher-risk lending such as consumer loans. At the same time, many banks have faced runs on their deposits after this spring saw several large bank failures.
Yet Bank of America has held up quite well. Its net interest income has increased 33% since the beginning of 2021, while its deposit base, which includes one of the largest piles of low-or zero-yield deposits in banking, has held up quite well. While depositors and investors alike have moved away from smaller banks, both parties see BofA as a strong, safe place to deposit money, and invest it.
While its stock has held up better than many of its peers, they have fallen some, on the usual -- not totally unreasonable -- concerns that come with economic uncertainty. But the sell-off shouldn't be a worry for long-term investors, and it's an opportunity for people with money they're looking to put to work. At recent prices, you can buy shares for less than 8.5 times earnings, and about 92% of book value (that's cheaper than the carrying value of all of its assets). And this has pushed the dividend yield above 3%, a respectable yield considering its stability.
Solid returns from choice real estate
Eric Volkman (Realty Income): I'm going with an oldie but goodie here, real estate investment trust (REIT) Realty Income. It's hard to move inside the REIT space without crashing into Realty Income, as it's a beast -- with a pending acquisition it's poised to become the fourth-largest REIT on the scene. It's also, for many investors, the top retail REIT on the market.
Realty Income likes to concentrate on single-unit buildings occupied by "high-quality" (read: very financially sound) businesses. 7Eleven is a tenant, to cite one of many examples, as is popular burrito slinger Chipotle Mexican Grill (NYSE: CMG).
The company's business strategy is to rent such spaces under long-term leases, i.e. those in force 10 years or more, under triple net lease terms (in which the occupant also pays taxes, insurance, and maintenance costs in addition to rent).
Realty Income has been doing its thing for more than 50 years, and thanks to organic growth and its increasing appetite for acquisitions, its take from those renters has snowballed lately. Revenue more than doubled in the short span of time between 2019 and 2022, hitting over $3.3 billion in the latter year. Funds from operations (FFO), the most crucial profitability line item for REITs, has followed a similar trajectory.
And like many successful property developers, Realty Income just keeps expanding. Its latest big-ticket acquisition, announced in October, is peer Spirit Realty Capital (NYSE: SRC). When consummated, the deal will add over 2,000 properties to Realty Income's already-bulging portfolio of 13,100. One very encouraging aspect of the buy is that it doesn't involve any of the buyer's precious cash -- it's an all-stock transaction.
Cash is crucial at Realty Income, because the company needs it to fund its highly popular dividend. It pays a distribution monthly, and has raised it a hard-to-believe 122 times since its 1994 IPO. The payout is a generous one too, with a yield approaching 6%.
A high tech powerhouse with decades of dividend growth behind it
Chuck Saletta (Texas Instruments): Earlier in 2023, technology juggernaut Texas Instruments hit a very important milestone by raising its dividend for the 20th consecutive year. For investors looking to build a retirement nest egg, a company that can consistently increase its payout may be a better idea than one that can simply maintain what it is handing to its shareholders.
This is because for a company to regularly raise its dividend, it has to earn enough to cover those payouts. Dividends are typically paid in cash, and lenders aren't too keen on lending money to companies that immediately turn around and hand that cash to their shareholders. As a result, dividends that aren't covered by a company's operations don't tend to last very long, much less grow
While Texas Instruments may be best known by consumers for their graphing calculators, the company's overall product range is far broader. It is a major semiconductor manufacturer. With over 80,000 unique parts in its catalog, it's very likely that a Texas Instruments product is embedded in something you own, whether you realize it or not.
The fact that its products are so ubiquitous provides good reason to believe that it can find a way to continue delivering growth over time. After all, semiconductors are at the heart of modern electronics, and as the world continues to digitize, the demand for them should continue to be strong.
Texas Instruments' dividend consumes around 65% of the company's earnings, which means it will have to keep growing its business for that 20 year streak of dividend growth to continue sustainably. Analysts expect it to post around 10% annual growth over the next five years, which does provide a decent reason to believe its trend can continue.
Add a solid yield of around 3.4%, and investors get a decent combination of current income and the long-term growth prospects that make it worth considering as part of a future retiree's portfolio.
Get started now to begin building your dividend portfolio
As great as Bank of America, Realty Income, and Texas Instruments' dividends may ultimately prove to be, you have to own their shares in order to receive those payments. Indeed, to get a dividend from any company, you must be a shareholder before a company's ex-dividend day, and hold at least until that ex-dividend date.
If you'd like to start using dividends to help you build your retirement nest egg, the sooner you get started buying shares, the sooner you will meet the requirements to receive that income. So make today the day you decide whether any of these three companies may have earned a spot in your portfolio.
