With the future for Social Security looking bleak and the days of pension plans fast dwindling, investors must use their own savings to generate income during their golden years. But two challenges income investors face these days are rock-bottom interest rates and being stuck with a cash flow schedule that's not on your schedule. So what's a Foolish investor to do?
On the battlefield of basis points
Limited options exist if you're clamoring for investment income to bridge the gap between what comes in each month -- Social Security and (maybe) a pension -- and what is spent. Here's what options look like these days for a 10-year, $100,000 income investment.
|
Investment |
Current Yield |
Interest Received Over 10 Years |
Value in 10 Years |
|---|---|---|---|
| Treasury bill | 1.72% | $17,200 | $100,000 |
| Investment-grade bond | 3.52% | $35,200 | $100,000 |
| High-yield bond | 7.07% | $70,700 | $100,000 |
Source: New York Times, Bloomberg.
Of course, an advantage with bonds is you invest $100,000 and -- at best -- your $100,000 is returned to you at maturity. The disadvantage: You receive not a penny more.
Don't fret
We receive our retirement income monthly and we pay our bills monthly, so why shouldn't our investments pay us the same way? One hassle-free way to achieve this is by buying a basket of rock-solid companies that pay their dividends in different months from one another.
I've harvested a basket based on the following criteria:
- Diversified companies with strong, competitive positions -- Brand dominance or special niches help these tenacious companies sustain long-term profitability.
- Strong yields -- Companies shelling out dividend yields at or greater than 3%.
- Stable dividend histories -- Companies that have paid dividends for at least a decade.
Five companies that fit these criteria are listed below.
|
Company |
Annual Dividend Yield |
Dividend Payout Months |
|---|---|---|
|
Sysco |
3.7% | January, April, July, October |
|
Clorox |
3.6% | February, May, August, November |
|
Applied Materials |
3.2% | March, June, September, December |
|
Vodafone |
6.6% | February and August |
|
BHP Billiton |
3.6% | March and September |
Source: Yahoo! Finance.
Collectively, this bundle of stocks is diversified across four sectors -- consumer goods, tech, telecom, and industrials -- and pays you income every month. Typically, we think of utilities and REITs for dividends, but this five-pack includes neither.
And remember that $100,000 mentioned earlier? Had it been invested a decade ago in these five stocks equally, you'd have pocketed a cool $70,000 in dividends plus $130,000 in capital appreciation on top of your original 100 G's. Of course, there's no telling what this basket will do over the next decade. But the dividends alone from these five stocks beat the pants off the S&P 500 in the same period.
Let's take a closer look at the companies.
Sysco
Sysco distributes food products and equipment to more than 400,000 customers including restaurants, schools, hotels, and hospitals. Sysco stands to benefit when discretionary spending increases as more people dine out. For the most recent quarter, sales were up nearly 6%, but earnings were down due, in part, to pension plan withdrawals. Despite this, its stock returned 9% over the past year. Sysco has increased its dividend nearly 7% annually during the past five years.
Clorox
Home to brands Glad, Brita, Burt's Bee's, Tilex, and Formula 409, 99-year old Clorox cleans up nicely with a maximum five-star rating from our CAPS community. CEO Don Knauss reported 4% top-line sales growth in the most recent quarter attributed in part to successfully passing higher input costs to consumers. Clorox has grown its dividend 11% annually during the past five years.
Applied Materials
This semiconductor equipment manufacturer has significantly increased revenue and net income in the past two years. Applied Materials is focusing business on chips for mobile devices after experiencing headwinds in its solar cell manufacturing segment. While it's becoming less rare to find dividend-paying tech companies, it's challenging to find one paying a solid 3%-plus yield. Applied upped its dividend nearly 9% last year.
Vodafone
Vodafone has sold most of its investments in wireless companies it didn't control including those in Asia and Poland. The cash raised from these sales has been used to support its dividend and reduce debt further improving Vodafone's already strong dividend growth outlook and healthy balance sheet. And Verizon Wireless, the joint venture between Vodafone and Verizon Communications, may soon receive regulatory approval on a lucrative cable deal.
BHP Billiton
As the trend of urbanization unfolds in developing countries, it's fueling high demand for building blocks of modern society like iron ore and copper. BHP Billiton is one of the world's leading suppliers of these materials. Its multiple business segments produce more than a dozen commodities; this diversification lets the company navigate volatile commodity pricing better than its peers. The company increased its dividend 17% annually during the past five years. And its low 21% payout ratio means BHP Billiton has lots of room to further grow its dividend.
Foolish bottom line
Consider this five-pack of dividend-paying darlings so you can get paid on your terms.
If you're interested in rounding out your income-generating portfolio with more great stocks, check out our free report. It's jam-packed with nine dividend stocks including one medical equipment company that boasts not only a 98% customer satisfaction rating, but also doubled its dividend payout since 2006. This report won't be available forever, so get your free copy today.
