Investors who are retired, or who are about to retire, could be looking for something more productive to do with their nest eggs than put money in a low-yielding bank savings account or certificate of deposit. With interest rates stuck near historic lows, it's hard to generate income. But for those investors willing to dip their toes into the stock market, buying high-yield dividend stocks can be a great way to earn a lot more investment income than you'll find from CDs, money markets, and even many different types of bonds.
One top dividend stock for retirees is Philip Morris International (NYSE:PM), one of the largest publicly traded tobacco companies in the world. Here's why Philip Morris International is a great pick for income investors looking for high yields right now.
Superior performance driven by strong business model
Philip Morris International was spun off from former parent company Altria Group (NYSE:MO) in 2008. At the time, Altria wanted to set its international business free from its domestic operations, which are under much tighter regulatory scrutiny. The thinking was that if the international segment traded as an independent stock, it would produce better returns on its own than the larger, combined company.
In hindsight, it's clear that Altria made the right decision, since Philip Morris International has significantly out-performed the market. Since the spin off, Philip Morris International shares are up 76%, while the S&P 500 Index is up 55%. And, these return figures don't include dividends. Philip Morris International's 4.6% dividend yield is more than double the S&P 500's dividend yield.
These fantastic returns are the result of Philip Morris International's strong business. Tobacco, particularly outside North America, remains a steady product with reliable demand. Philip Morris International generated $6.9 billion of free cash flow over the first nine months of the year, excluding the effects of currency translations. With this cash flow, the company is able to pay its generous dividend.
Of course, those dividends are presumably why most retirees would buy Philip Morris International. The stock is a high-yielder, which is rare nowadays in this environment of low interest rates. Even better, Philip Morris International has also raised its dividend each year since its spin-off. Over the past five years, Philip Morris International increased its payout by 11% compounded annually.
Philip Morris International currently pays out about 80% of its free cash flow as a dividend. Double-digit dividend growth may not be possible unless the company is able to grow free cash flow at a similar rate. The company is planning 4%-5% price increases to offset the decline in smoking. In addition management expects to cut $300 million in cost savings through productivity initiatives. The company is taking action to protect free cash flow, and plans to create value through $4 billion in planned share buybacks. While its free cash flow is difficult to forecast, these are optimistic signs for Philip Morris International
Fantastic income potential for retirees
The best dividend stocks will raise their payouts every year. That means your income could grow well above the rate of inflation. For example, if you bought 100 shares of Philip Morris International at its initial public offering, you'd receive about $208 in your first year of ownership. In the last 12 months, however, your income would have totaled about $382. And, keep in mind, these calculations don't include the effects of dividend reinvestment. Had this investor reinvested their quarterly dividends in purchasing more shares, the income potential would be far greater.
This is what makes Philip Morris International a very good dividend stock for retirees to own. One of the key risks to retirees is that they will outlive their money. With interest rates so low and the cost of most everyday items continuing to rise, it's critical for retirees' nest eggs to keep up with inflation. A great way to do this is by investing in high-dividend stocks. For those who are comfortable enough to take the risk of investing in individual stocks, one of the top picks for retirees is Philip Morris International.
Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools 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.