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Let These Dividends Fund Your Retirement

By John Rosevear – Updated Apr 6, 2017 at 8:44PM

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Why dividend stocks make sense even if the market goes nowhere.

Lots of long-term investors love dividend stocks, and with good reason. Simply put, the best dividend stocks give you reliable gains year in and year out, thanks to that steady stream of dividend income.

This is especially true if you can keep the tax man away by holding your dividend stocks in an IRA. Deferring the need to pay taxes (or avoiding them altogether with a Roth IRA) lets you reinvest all of those dividends, giving you more shares to grow with the market over time.

That steady growth means that good dividend stocks are a great cornerstone for your retirement portfolio -- or any long-term investment plan.

Even -- or maybe especially -- in times when the stock market's prospects aren't looking good.

Dividends for all seasons, even the nasty ones
It's no secret that the stock market isn't looking likely to be a source of exceptional returns over the next decade. The market may have crashed in epic fashion just a couple of years ago, but the dramatic recovery (of stock prices, if not the economy) means that here in 2011, stocks are fairly expensive in historical terms. Combine that with the likelihood of several more years of sluggishness as the global economy continues to try to sort itself out, and the prospects for big growth in the major stock indices seem low.

That means that the additional growth fuel provided by good dividends will be even more important to those of us saving for retirement over the next several years. But how do we find these "good dividends"?

I'm glad you asked.

Seek ye the aristocracy
Every year, Standard & Poor's publishes a list of what it calls "Dividend Aristocrats." Despite the slightly dorky name, it's a really useful tool: All of the companies listed have raised their dividends at least once every year for the last 25 years.

That's an impressive feat, particularly when you think about the gyrations we've seen in the market (not to mention the economy) over that time. Lots of companies have cut or even eliminated their dividends during hard times, but these firms not only kept paying, they kept boosting their payouts. That's why the Dividend Aristocrats list is one of my favorite places to look for solid, established companies that I can count on to pay a good dividend year in and year out -- the kinds of companies that will look particularly good in our retirement portfolios.

So what kinds of companies are Dividend Aristocrats? Many are familiar names -- soda-and-snack-giant PepsiCo (NYSE: PEP), for instance, or big-time paint-maker Sherwin-Williams (NYSE: SHW). Either would look fine in your IRA -- both are well-run companies with solid dividend yields and businesses that should stay strong even if the economy goes south again.

But I always like to look beyond the obvious, particularly when buying stocks. Here are three somewhat less obvious ideas that may be just right for you:

  • Seasoned Fools will no doubt tell me that Automatic Data Processing (Nasdaq: ADP) isn't exactly a "less obvious" idea. But it's a fine one: ADP is a huge provider of payroll processing and other HR services to companies big and small, a position that gives it a wide moat and a steady recession-resistant income stream. The stock's a tiny bit expensive at the moment, but its above-average 2.7% dividend yield and rock-solid industry position might make it a bargain over the long haul.
  • Kimberly-Clark (NYSE: KMB) may or may not be a familiar name, but you probably see this company's products -- products with names like Kleenex, Huggies, and Cottonelle -- all the time. I recommended this stock repeatedly during the market turmoil of 2008 and 2009, and it's just as good a buy right now. Why? It's extremely well-run, it's a recession-proof business (think about this: How bad do things have to get before you give up toilet paper?) with a wide moat, and it pays a fat 4% dividend that's very likely to grow, as the company has been raising it for 39 years and counting.
  • With a whopping 5.5% dividend yield, Cincinnati Financial (Nasdaq: CINF) is one of the highest-yielding of the Dividend Aristocrats. And that dividend is pretty secure: This well-run insurance firm hasn't cut its quarterly dividend since 1960, and careful management suggests that that trend will continue. Fool Sean Williams recently opined that "insurers don't get much better than Cincinnati Financial," and I'm inclined to agree.

As I said above, stocks like these, with reliable upside and lower risk than many, are great cornerstones for any long-haul portfolio. That will be especially true if Mr. Market's returns are unimpressive over the next decade, and even more so if the market's returns are next to nothing.

This is how to make something out of nothing
Yes, nothing. Low growth is one thing, but what if the market's flat? It's a definite possibility, and a worrying one. Can dividends help us out? Foolish retirement guru Robert Brokamp pondered the question in an article in the new issue of Rule Your Retirement, available online at 4 p.m. ET today.

I'll point you to his article for the full analysis, but the gist is this: Thanks to the power of compounding, a portfolio of dividend stocks that average a 3% yield will actually pay significantly more on an annualized basis over the course of a decade or two. Even if we assume that stock prices stay absolutely flat, we can generate 8% or more returns over an extended period by buying the right dividend stocks and reinvesting the proceeds.

That's a big deal, and I encourage you to check out Robert's article for the full scoop. Rule Your Retirement is a paid service, but don't let that stop you. Just grab a free trial to get full access for 30 days, with no obligation. Signing up takes just seconds -- click here to get started.

Fool contributor John Rosevear has no position in the companies mentioned. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams, Kimberly-Clark, PepsiCo, and Automatic Data Processing, as well as creating a diagonal call position in PepsiCo. 

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.

Stocks Mentioned

Automatic Data Processing Stock Quote
Automatic Data Processing
$264.39 (-2.04%) $-5.51
Kimberly-Clark Stock Quote
$137.17 (-0.55%) $0.76
Cincinnati Financial Stock Quote
Cincinnati Financial
$107.87 (-2.30%) $-2.54
PepsiCo Stock Quote
$183.12 (-1.38%) $-2.57
Sherwin-Williams Stock Quote
$253.59 (-1.61%) $-4.16

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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