With interest rates near all-time lows, retirees are looking further up the risk curve for income to cover their costs in retirement. Dividend-paying stocks are a natural next place to look, but they come with a huge asterisk attached. Those payments are not guaranteed, and as 2020 showed us, companies can and will cut their dividends if their business gets into deep enough trouble.
As a result, if you're looking for dividends to be a source of your retirement cash, you need to consider the quality of those dividends as well as the amount of dividends you get. You also should set yourself up so that instead of directly spending them, your dividends help feed a savings or bond ladder, and that ladder provides your actual spending cash. That way, if your dividends do get cut, you don't find yourself scrambling for cash.
With those key parameters in mind, here are three dividend stocks that just might be perfect for retirees to consider.
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A telecom company at the center of your digital life
One of the top players among wireless communications companies in America, Verizon Communications (VZ +0.02%) plays a key role in modern life. Importantly, as the threat of cybertheft continues to climb, more and more businesses are beefing up their security. Many of those increased security measures rely on two-factor authentication for logging in to important sites, and texts or alerts to cellphone apps often play a part of those systems.
Cell phones have been a key part of people's lives for years, but tying them to access to critical financial and other important sites adds a whole level of stickiness to their use. That bodes well for large carriers like Verizon, as the additional effort of switching the two-factor authentication schemes may dissuade consumers from canceling service just to save a few dollars. It won't necessarily stop people from switching carriers, but it does provide a reason to believe the market will remain strong overall.
From an investing perspective, Verizon sports a yield of around 4.4%, and that dividend consumes around 56% of the company's earnings. Analysts' expectations of modest growth over time provide a good reason to believe that dividend can be maintained, and the company did manage a slight increase in its dividend in mid-2020. That combination adds up to a company with a decent payout that looks worthy of consideration for a retiree's dividend portfolio.
An energy company that isn't tightly tied to oil prices
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Phillips 66 (PSX +0.28%) doesn't specialize in pumping oil out of the ground, but it does refine it, transport it, market it, and produce chemicals from it. That key aspect of how it operates helps protect it from the impact of the wild swings in energy prices that often hit the exploration and production giants of the industry. After all, when oil prices rise, so do gas prices, and when oil prices sink, so do gas prices.
The result is a business that is much more tied to the demand for oil and gas and related products than it is to the price of that key feedstock commodity. Sure, when oil prices swing, its margin on its inventory and in-process products can be affected, but over time and with good inventory management practices, that can be dealt with.
Because of that, Phillips 66 has been able to maintain its dividend and have it adequately covered by its operating cash flow despite the massive economic disruption we faced in 2020. If vaccinations and treatments for COVID-19 enable people to get back closer to normal in 2021, then demand for its products and services should improve.
Its dividend yield is around 5%, and analysts are expecting a return to solid profitability in 2021. The decent and still covered dividend combined with a strong reason to believe its business will be better in 2021 makes Phillips 66 worthy of consideration for a retiree's dividend portfolio.
An insurance business that prides itself on being "rock solid"
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Insurance is the business of pricing risk. When insurers price it correctly, they can earn a fair return on their premiums while still paying out the claims of those that bought and needed to use the policies. When they underprice that risk, they rely on their balance sheets to cover the unexpected overages. That makes balance sheet strength a key factor in determining whether an insurance company is worth considering, and it's a clear reason why Prudential Financial (PRU 0.41%) can make that list.
Prudential Financial is so proud of its rock-solid financial position that it uses the Rock of Gibraltar as its corporate symbol. It backs that boast up with over $400 billion in bond holdings on its balance sheet as part of its net equity above $66 billion. As an insurance company, that means a lot can go wrong -- above and beyond what it's already expecting -- and it can still meet its obligations and remain solvent.
Investors in Prudential Financial get a yield of around 5.2% that is well covered by the company's operating cash flows over the past 12 months. Note that the company has cut its dividend in the past -- most notably during the financial crisis in 2008 -- but it has also been quick to restore that payment as its business recovered.
That shows how important maintaining its balance sheet strength is to its business, which is good for its long-term health. It's also a clear example of why retirees looking for dividends should use those dividends to replenish a CD or bond ladder instead of spending them directly. After all, if even a rock-solid company like Prudential can lower its dividend, then retirees can't completely rely on that dividend to cover their immediate needs.
Replenish your retirement cash with dividends
Verizon, Phillips 66, and Prudential Financial operate in vastly different industries. What they all offer their owners is decent incomes backed by solid operations that manage to generate cash even in tough times. That combination makes each of them worthy of consideration for retirees looking for dividend stocks as part of their portfolio.
Just be sure to recognize that those dividends are not guaranteed payments, and build your plan accordingly to have those dividends help replenish your CD or bond ladder. That way, you'll have the benefits of those dividends when times are good while still having the cash to cover your near-term costs if those dividends stumble.
