With baby boomers beginning to retire en masse, many Americans are wondering whether they have enough money to support them through retirement -- and rightfully so, given that many are woefully unprepared to exit the workforce for good. So let's talk about a powerful investing strategy that can give you a large and steady income stream in retirement.

A famous 1994 study by William Bengen gave us the famous "4% drawdown" rule of thumb, which states that retirees should withdraw no more than 4% of their portfolio each year in order to not run out of money. Bengen also suggested that a mixture of 60% equities (stocks) and 40% intermediate government bonds is, in general, the optimal asset allocation during retirement. This article will introduce you to one of the most powerful strategies in the entire investing universe and explain how it can help you live your dreams in retirement. 

The power of dividends to improve your life during retirement
A 2008 study found that between 1968 and 2007, the 100 top-yielding stocks in the S&P 500 returned 13.52% annually versus 10.53% for the S&P 500 as a whole.

That's the difference between a $10,000 investment becoming $496,000 after 39 years (insufficient for retirement) and $10,000 growing to $1.41 million (more than sufficient). In addition, this portfolio had a sharpe ratio (which measures a portfolio's proportion of reward to risk) that was 43% better than the broader market's. 

If that weren't enough, Bengen claimed that, should a retiree pursue a high-yield portfolio strategy, their maximum safe withdrawal rate could be raised to 5% annually, greatly improving their quality of life during retirement.

The power of dividend growth to help you reach and sustain retirement
In 2004, Ned Davis released a study showing that not only do higher-yielding stocks do better than the market over time, but those that grow their dividends are the top-performing stocks of all:

Dividend Policy Annual Return 1972-2004
S&P 500 8.5%
Non-dividend payers 4.3%
Dividend cutters and eliminators 5.2%
Dividend growers 7.2%
All dividend payers 10.1%
Dividend growers and initiators 10.6%

Source: "DIVIDENDS, METALS, AND 1960 REPLAYS," Ned Davis Research.

Even if you're late in the game, you can still save a tidy sum for retirement. For example, someone who is 40 years old and doesn't have a penny in savings would need to invest just $8,400 per year in a diversified dividend growth portfolio to have $1 million saved by age 65, assuming they achieved the long-term historical returns found in Ned Davis' research.

Meet the dividend kings
You may have heard of the "dividend aristocrats" -- stocks that have grown their dividends for 25 consecutive years. However, there are a select few stocks that rise to a more select category: "dividend kings." These stocks have 50 years of consecutive dividend growth under their belts. Any stock that reaches this level has not only proven itself shareholder-friendly, but has proven it has a durable competitive advantage, is governed by management with long-term thinking, and can adjust to changing economic realities -- all important qualities in the investments that will sustain you during your golden years.

Most investors know the most famous dividend kings -- consumer goods companies such as Johnson & Johnson, Coca-ColaProcter & Gamble, and Cologate-Palmolive. However, I'd like to introduce you to six lesser-known names.

Introducing the industrial dividend kings

Company Yield Consecutive Years Raising Dividend 20-Year Dividend Growth Rate 21-Year Total Returns
Diebold 3% 61 8.61% 6%
Nordson 1% 51 8.9% 10.3%
Dover 1.7% 59 9.11% 11.6%
Parker-Hannifin 1.7% 58 9.4% 13.2%
3M 2.4% 57 6.67% 11.5%
Emerson Electric 2.7% 57 8.29% 10.1%
S&P 500 1.89%   5.05% 9.6%

Sources: Yahoo Finance, Multpl.com, Fastgraphs.

What makes these companies such powerful dividend growth engines?

All these companies except for Diebold are diversified global industrial conglomerates that produce dozens or even hundreds of vitally important industrial components for crucial industries such as health care, utilities, telecom, aerospace, the oil and gas industry, and agriculture. These are industries that are set to benefit from major global trends.

For example, IHS Global estimates that the U.S. energy industry is expected to see $890 billion in investment through 2026 alone. In addition, according to the Global Commission on the Economy and Climate, $90 trillion will need to be spent on the world's energy infrastructure through 2035, which is likely to mean strong sales for Emerson Electric's and Dover's energy segments.

Meanwhile, with the world's population aging and expected to grow to 9.4 billion by 2050, demand for health care, agricultural products, and food storage will directly benefit companies like 3M, Nordson, Parker-Hannifin, Dover and Emerson Electric.

Diebold's specialty is ATMs, bank automation systems, payment terminals, and security systems (including biometrics) for these devices. This means the company is likely to profit from growing concerns regarding payment security in a digital age. 

Another reason to like these firms is that they are all between 79 and 155 years old. The fact that many of these companies have managed to survive and prosper for about a century shows their durable competitive advantages, long-term management thinking, and flexibility in the face of major global economic events. For example, Diebold, Parker-Hannifin, Emerson Electric, and 3M have all survived two world wars, the Great Depression, and numerous bear markets.

That kind of track record speaks well of these companies' ability to continue prospering and rewarding long-term shareholders well into retirement.


Adam Galas has no position in any stocks mentioned. The Motley Fool recommends 3M, Coca-Cola, Emerson Electric, Johnson & Johnson, and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our newsletter services free for 30 days. We may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.