Social Security income only gets you so far in retirement -- and you can interpret "so far" to mean less than halfway. For the average retiree, Social Security replaces about 40% of working income. The other 60% needed to fund your lifestyle has to come from another source, and dividend stocks may be your answer.
The right dividend stocks produce fairly reliable, truly passive income at yields well above what you'd earn with bonds.
There are roughly 3,000 public companies paying dividends today, at yields ranging from less than 1% to 8% or more. Many of them are not suitable for retirement income, either because the share price is too volatile or the dividend payment is likely to be inconsistent. A volatile share price can limit your future growth opportunity and also lure you into frequent trading. And a dividend you can't rely on isn't very helpful when you have bills to pay.
Your best dividend-paying options are stable, mature companies that have demonstrated the ability to power through all economic cycles. They're generally characterized by strong balance sheets, established brand names, experienced leadership teams, and loyal customers. These aren't the companies that will dazzle you with high growth rates or 10% yields, but they should be relatively reliable in terms of share price appreciation and income production. They're the kind of companies you can buy and hold for the long haul.
Here's a look at three stocks that fit the bill.
1. Healthcare giant with diverse portfolio
You might know Johnson & Johnson (NYSE:JNJ) from its consumer brands such as Johnson's, Tylenol, Band-aid, and Neutrogena. What you may not know is the company operates two other major divisions: pharmaceuticals and medical devices. The company's pharmaceutical business is the third-largest drug company in the world. And the medical devices division has a stronghold in contact lenses, along with a presence in faster growing fields such as digital robotic surgery. The breadth of Johnson & Johnson's business is appealing, because no single product, sector, or customer group carries too much responsibility for the company's future performance.
Notably, Johnson & Johnson has increased its dividend for 57 consecutive years, thanks to ample cash flow that funds dividend payments as well as growth acquisitions. The forward dividend yield is 2.5% as of this writing.
2. Leader in a business with stable demand
Public Storage (NYSE:PSA) is the world's largest owner and operator of public storage facilities. The company's footprint includes about 2,500 locations across the U.S., as well as an ownership position in 100 U.S. business parks and more than 200 storage facilities in Europe.
Demand for self-storage holds up well through economic downturns, which makes for a fairly stable business model. Public Storage also benefits from strong brand recognition. The company has recently stepped up its strategic growth planning by adding new expertise to its board and forming a committee to focus specifically on long-term strategy. These actions were taken at the urging of shareholder and hedge fund Elliott Management, which is motivated to improve shareholder returns.
Public Storage has low debt levels and strong cash flow. Its latest quarterly dividend of $2.00 per share marks the company's 155th consecutive quarterly payout. The forward dividend yield is 3.6%.
3. Mature beverage company that innovates
Coca-Cola (NYSE:KO) is more than your favorite carbonated beverage. The company has its established carbonated soda business that's supported by a global distribution network. But company leadership balances the mature side of the business with growth from international markets, innovation on established products, and acquisitions. Performance in the fountain soda side of the business has been affected by coronavirus lockdowns, but Coca-Cola's efforts to expand its retail offerings and gain traction in faster-growing segments like coffee and energy drinks should help offset the slowdown going forward.
Its strong cash flow record supports its growth strategy along with 58 years of consecutive dividend increases. The company's forward dividend yield is 3.2%.
Cash is king
These three companies are consistent cash generators, which allows their respective leadership teams to pursue growth while rewarding shareholders with dividends. That's the combination you want to see for a reliable and even increasing stream of dividend income in retirement.