When it comes to investing for retirement, not all dividend stocks are created equal. Once retired, you'll need to generate reliable income from your investments. Therefore, the trick is to find a mix of quality companies that have a long history of rewarding shareholders through dividends and share buybacks. To help you get started, The Motley Fool's top contributing analysts explain why Whole Foods (WFM), Target (TGT -0.97%), and Diageo (DEO -1.69%) are three of the top dividend stocks for retirees to buy today.
Joe Tenebruso (Whole Foods): An often-overlooked yet important aspect of retirement investing is ensuring you have an adequate growth component. If retired investors focus solely on the current yield of their portfolio, they could be in danger of having their purchasing power slowly eroded as inflation takes its toll. That's why I often recommend businesses that are likely to grow their dividends substantially in the years ahead.
However, before a business can sustainably increase its payouts to shareholders, it must first grow its cash flow. Therefore, one of the best ways to identify the dividend superstars of tomorrow is to seek out businesses with strong competitive advantages, excellent leadership, and long runways for revenue and earnings growth.
Whole Foods fits this description well. The company is the leader in natural and organic foods, a long-term trend that I expect to become increasingly popular with a growing number of more health-conscious consumers. Co-founder and co-CEO John Mackey has successfully led Whole Foods since the company's inception in 1978, and has delivered total shareholder returns of more than 3,600% since the company's IPO in 1992. Yet, at only about 400 locations today, this grocery pioneer is still only about one-third of the way toward reaching management's long-term store count goal of 1,200 locations. That means Whole Foods likely has more than two decades of store-count expansion, revenue growth, and steady increases in cash flow still ahead. I expect Mackey and his team to continue to pass on that cash flow to Whole Foods' stockholders in the form of rising dividend payouts and share buybacks, which should deliver a tasty blend of income and share price appreciation to patient, long-term investors.
Brian Stoffel (Diageo): When I think about top dividend stocks for retirees, my mind doesn't immediately go to high-yielding stocks, or even to those that are in the hottest industries. Instead -- because I think most retirees would prefer to focus on the finer things in life rather than their investment portfolio -- I think of dividend stocks where you can "buy 'em and fuhgeddaboudit."
That's why I believe consumer-facing stocks for companies that focus on providing consumers with basic goods -- the kind of things that people will buy in both good and bad economic times -- are a great bet for retirees. Among this set of companies, I'd say none offers a better dividend than Diageo, owner of many popular alcohol brands, including Baileys, Smirnoff, Tanqueray, Captain Morgan, Johnnie Walker, and Guinness.
Source: Diageo.
Shareholders do need to be aware that some of the company's most popular value brands have had trouble lately, as weakness in Asia has tapered growth, and there's lots of competition both in Europe and the United States. The company's diverse range of products, however, has helped offset this slack. Premium and midtier brands Bushmills, Captain Morgan, and Don Julio tequila posted volume growth of 8%, 6%, and 27%, respectively, for the fiscal year ending in June.
As global economies continue to recover from the Great Recession, I also fully expect spending on the value and low-tier brands to improve.
Last year's dividends -- European companies tend to pay two dividends, one accounting for 40% earlier in the year and one for the other 60% later in the year -- paid out a yield of about 2.8% at today's prices. Since 2009, that dividend has gone up by about 8% per year. If the company holds steady at that pace, investors could get a yield of about 3% today -- a pretty great deal for a stable of such solid brands.
Tamara Walsh (Target): Low risk and high dividend growth are two important factors to consider when investing for retirement. That makes the Dividend Aristocrats, stocks that have consistently increased their payout for at least 25 years without fail, a great place to begin your search. These companies provide a steady stream of reccurring income for shareholders.
Target gets top marks in this respect because it has paid a dividend every year since 1967, and has increased its dividends annually for the past 42 years straight. The discount retailer in June raised its quarterly dividend by 21% to $0.52 per share, or $2.08 per share annually. Moreover, the company paid shareholders $272 million in dividends during the second quarter this year, which was an 18% increase over last year. Retirees will also benefit from Target's market-beating yield of 3.3%.
The retail chain suffered a weak holiday shopping season last year after its massive data breach and a soft entry into the Canadian market. However, it's important to put these setbacks into perspective. After all, Target still generated $72.6 billion in annual sales last year. Additionally, investors could see accelerated earnings growth in coming years if Target's new management team can improve its Canadian business. In the meantime, retirees can count on Target to increase its already reliable dividend for many quarters to come.
