Traditionally, retirees have relied on bond interest to provide income for their retirement. With even 30-year Treasuries recently yielding a mere 1.23%, that strategy doesn't work as well as well as it used to. Even in today's low-interest-rate environment, bonds should still pay a key role in your retirement portfolio. For income generation, however, you'll have to move farther up the risk curve to have a decent chance at delivering cash to your pocket.
Dividend stocks can provide that higher level of income, but it comes with a catch: Dividends are not guaranteed payments, and companies can cut their dividends if times get tough. So to find dividend stocks worthy of consideration to own, you need to look beyond just the yield and at why that dividend looks capable of being maintained. With that in mind, here are three top dividends stocks for your consideration for a better retirement.
No. 1: If it walks like a duck
Supplemental insurance giant Aflac (AFL 1.33%) may be best known for its spokesduck, but the company offers investors a well-supported income stream that currently supplies a yield around 3%. That dividend consumes only about 28% of the company's trailing earnings, so even if COVID-19 puts a damper on its near-term prospects, it has plenty of wiggle room to protect that payment.
Backing up that modest payout ratio is a balance sheet with over $4.1 billion in cash and equivalents and over $140 billion in bonds on it. Overall, Aflac sports more than $26 billion in net equity on its balance sheet. That means it can see a lot go wrong above and beyond what it has already priced into its insurance policies and still wind up OK.
Insurance companies are in the business of pricing risk. If the surprise of COVID-19 means that its policies were underpriced versus current reality, then Aflac has the opportunity to raise its rates on renewals and new policies to reflect that reality. That makes it likely that if the company does face a disruption from the virus, it has a path to recover over time. When combined with its solid balance sheet and low payout ratio, there is great reason to believe that its dividend can be maintained.
In addition to that strong foundation, Aflac also has a 37-year history of increasing its dividends. Although the past couple of increases have been small, they've still been rising over time. That long-term commitment to dividend growth also suggests that if the company can continue to raise its dividends over time it will.
No. 2: With a name like this, it has to be good
Food giant J.M. Smucker (SJM 1.23%) is well known for its namesake food spreads, but the company's empire extends well beyond those tasty lunch staples. Jif peanut butter provides a natural pairing for its jellies. In addition, more Americans that start their day with a cup of coffee at home start it with a coffee from J.M. Smucker than from any other company. That's because the company owns the Folgers, Dunkin' and Cafe Bustelo coffee brands.
As if feeding and energizing your human family weren't enough, Smucker owns several well-known pet food brands as well, including Meow Mix, Kibbles & Bits, Milk-Bone, and 9Lives. During the COVID-19 pandemic, pet adoptions have skyrocketed. All those pets need to be fed, which bodes well for the company's ability to navigate these unprecedented times.
From a dividend perspective, Smucker recently increased its payment to $0.90 per share per quarter, representing a 3.3% yield at recent prices. That dividend consumes just over half the company's trailing income, and it has increased its payment to shareholders for 19 consecutive years.
With a business focused on everyday essential at-home food items for you and your pets, Smucker is well positioned for this time of social distancing and otherwise increased at-home time. With a history of dividend increases that goes back almost two decades, it has a track record of rewarding its owners that goes back well before this mess started. With a payout ratio of around half its earnings, it has room to keep up that trend. That combination adds up to a dividend paying company worthy of consideration.
No. 3: Here's what's keeping what's going, going
Despite the measures put in place to slow down the spread of COVID-19, essential products are getting delivered to stores, cars can gas up, and people's hot water and air conditioners are still running. What all those industries have in common is the need to transport energy from where it's produced to where it's processed and used. On that front, Canadian energy transportation giant Enbridge (ENB 0.31%) serves an important role in keeping those critical energy flows going.
Enbridge is the largest energy infrastructure company in North America, with over 17,000 miles of oil pipelines and 23,000 miles of natural gas pipelines crisscrossing the continent. Scale matters in energy pipelines, as there's often strong pushback against the building of new pipelines. That helps existing pipelines maintain a moat -- since it's usually easier to keep existing pipelines going than it is to get permission to build new ones.
Pipelines are also generally among the cheapest ways to move that energy around, making them the preferred method for shipping energy in times of slowed overall energy demand. That, along with frequent "take or pay" contracts that require producers to pay something for pipeline capacity whether they use it or not, helps keep energy -- and cash -- flowing through pipelines.
As a Canadian company, Enbridge will see its dividends fluctuate in U.S. dollar terms depending on the exchange rate. Still, in its home currency terms, that dividend has increased for 25 consecutive years, including a nearly 10% increase in 2020. The company targets paying out around 65% of its distributable cash flows as its dividend, giving it the ability to invest in maintaining and building its infrastructure while still rewarding its shareholders.
Thanks to COVID-19 fears, Enbridge's shares have dropped this year. That drop gives investors a whopping 7.7% yield. Despite the challenges affecting energy overall, Enbridge expects to generate a similar level of distributable cash flow in 2020 as it did in 2019 and to return to growth in 2021. That confidence, along with the company's critical infrastructure position, gives reason to believe the dividend can be maintained -- and potentially even continue to increase over time.
Businesses worth considering in uncertain times
Low bond yields mean that retirees looking for income from their portfolio are turning more toward dividend stocks to find that cash. In times when an uncertain economy means that dividends are likely to get cut, finding quality payments with a good chance of continuing is key toward keeping that cash flowing to your pockets.
Although Aflac, J.M. Smucker, and Enbridge all operate in vastly different industries, they all provide decent current income and good reasons to believe that income can keep flowing, even today. That combination makes them top dividend stocks for your consideration for a better retirement.