Stocks That Pay You Back

What will you use to generate income in retirement?

Many investors think low-risk fixed-income products like Treasury bonds and CDs will do the trick. But as current retirees have learned in the past few years, these products may not be enough. Since 2001, for instance, the yield on the 10-year Treasury hovered between 3% and 5% -- generating a paltry $300 to $500 per year for each $10,000 invested.

That's simply not enough to live on today, let alone 10 or 20 years down the road.

So what's an investor to do?

Get started now
At first glance, large dividend-paying stocks with single-digit growth don't seem all that attractive, especially when stocks like Google and Apple are burning up the charts. But these large dividend-paying stocks just might end up being your best friend when retirement finally rolls around.

The catch is that to maximize the utility of dividend-paying stocks, they should be purchased well before you actually need the income. That's because the longer you hold onto a dividend payer, the bigger your dividends tend to get.

For example, an investor who picked up $10,000 worth of Altria in January 1970 initially acquired 277 shares, a stake that would have started by paying out a mere $69 per quarter at the time.

That wasn't much then, but after 37 years of stock splits, our hypothetical investor now has 26,592 shares of Altria and 18,402 shares of the recent spin-off of Kraft -- altogether worth approximately $2.5 million today. Perhaps, more importantly, our investor would be receiving $109,878 each year in dividends. (It should also be noted that these figures would be even larger if the investor reinvested dividends over the years.)

It's hard to believe, but this one stock alone could have funded your retirement.

Staring you in the face
While Altria is an incredible example, investors in other stalwarts have seen similar (albeit somewhat lesser) successes over the same time period:

Sure, there were better-performing stocks during this period. Southwest Airlines (NYSE:LUV) has returned 23% annually since 1973, and Stryker (NYSE:SYK) has returned 27% since 1979, but these were small-cap companies back then and weren't on many investors' radar screens.

What's remarkable about the companies listed in the table is that they had already reached blue-chip status in 1970. You didn't have to dig around to find them or take a flier on a hot new technology. These companies were simply doing what they had done for decades -- grow steadily and reward shareholders.

Foolish bottom line
So what are the best stocks to generate income for your retirement? The simple answer: stocks that pay you back.

But all dividends aren't created equal. That's why Fool advisor James Early and his Motley Fool Income Investor team look for businesses with strong track records that are set up nicely for future growth. They've earmarked companies such as Washington Mutual (NYSE:WM), the largest thrift bank in the United States, which doles out a 4.8% yield, and Norsk Hydro, a $30-billion Norwegian oil and gas producer paying 2% to its shareholders.

If you want to see the rest of the Income Investor recommendations, follow this link for a free 30-day trial to the service. Time is the only thing stopping you from reaping the rewards of dividend stocks for years to come, so get started now!

This article was originally published on Dec. 22, 2006. It has been updated.

Todd Wenning owns shares of Procter & Gamble but of no other company mentioned in this article. Pfizer and Coca-Cola are Motley Fool Inside Value picks. Kraft is an Income Investor selection. The Fool's disclosure policy pays dividends every day.