The lowest-risk, most secure way to a great retirement is to invest in blue-chip stocks. That's what I'll attempt to convince you of in the next three minutes, because I think the case is absolutely overwhelming, and it's where I'm putting my family's money.
One caveat before we get started: Blue chips are not the way to grab slam-dunk, overnight returns -- you won't be eating caviar and vacationing in Majorca by next week. But because they produce steadily rising payouts and are the most solid companies around, dividend-paying blue chips are the surest way to guarantee that you'll have income when you need it most.
A case for blue-chip dividends
My case for dividend-paying blue chips is based on their rock-solid stability. You know stalwarts like Procter & Gamble
These types of companies have the security of broad-based revenue streams, high levels of investor confidence, and the access to financial markets that comes with such confidence. And all of that maturity and stability enables them to pay investors billions of dollars in dividends.
Not all dividends are equal, however, as the past few years have shown us. More than one formerly solid company had to cut or suspend dividends when the market tumbled -- think Bank of America
You want to invest in blue chips that have proven that they are committed to maintaining and increasing their payouts over time, and a company that survived this recession without slashing dividends is a pretty solid bet.
Such businesses will reward your trust over the long term, as they've rewarded countless investors before.
Grow toward the good life
And it's this component -- increasing dividends over time -- that will secure you an income for life so that you never have to rely on a stock appreciating in order to afford a vacation or the life you want. With blue-chip dividend payers, you can create an income stream that's much better than those from typical annuities.
To give you an example, look at five high-quality companies that have treated investors to ever-increasing payouts:
|
Company |
Current Yield |
5-Year Dividend Growth Rate |
|---|---|---|
|
Procter & Gamble |
2.8% |
11% |
|
Colgate-Palmolive |
2.5% |
12% |
|
Exelon |
4.6% |
10% |
|
McDonald's |
3.5% |
31% |
|
Magellan Midstream Partners |
6.3% |
11% |
Source: Capital IQ, as of Feb. 11, 2010.
Already those yields beat almost any interest rate you could get from bank deposits. But the beauty of committed dividend payers is that their payouts go up over time without you having to reinvest those dividends. That last point is critical if you intend to live on your dividend income.
Simple works
The simplicity of this strategy is amazing. If you buy the blue chips, especially ones focused around sustainable consumer brands, it's about as "set and forget it" as investing comes.
Consumer-focused brands are a great place to begin, but be cautious of businesses that are already facing significant headwinds, no matter how juicy their payouts.
Take Altria
Hitch your wagon to these stars
Dividend-increasing blue chips are a stable way to give yourself the income you need to thrive in retirement.
If you want more dividend stocks that could help give you the good life, regardless of the ups and downs of the stock market, consider joining Income Investor as our free guest for 30 days. The experts at Motley Fool Income Investor are focused on companies that offer a yield of 3% or better. But will those dividends last -- and will you get a bigger raise next year? Our experts can provide skilled analysis on which dividends are sustainable – and which are likely to be increased. Just click here to get started.
Jim Royal, Ph.D. owns shares in Bank of America and Procter & Gamble. Johnson & Johnson and Procter & Gamble are Income Investor recommendations. Exelon is a Inside Value recommendation. Motley Fool Options has recommended a buy calls position on Johnson & Johnson. The Fool owns shares of Procter & Gamble. The Fool has a disclosure policy.
