A key concern for retired investors is income. Pensions provided much of that to many people just a generation or two ago, but they're an endangered species now. Aggressively funding retirement accounts such as IRAs and 401(k)s can be a smart move -- and savvy investors will also consider adding healthy, growing dividend-paying stocks to their portfolios.
Brian Stoffel: There's no such thing as a "perfect" dividend stock, but Verizon has the three big characteristics I look for in solid retirement stocks. First, it is a company with a sustainable competitive advantage. Entering the telecom business requires massive upfront capital investments -- and with a market share of over 30% in the U.S. wireless industry, Verizon has a significant moat surrounding itself.
The second trait is that the company is somewhat insulated from a financial downturn. While certainly every company will suffer if we experience another Great Recession, people will wait until times are really tough before giving up their smartphones, cable plans, or Internet access -- all of which Verizon provides.
But perhaps most importantly, Verizon has a very stable and safe dividend payout -- which currently yields almost 4.5%. Over the past 12 months, the company has brought in $18.8 billion in free cash flow. Of that, the company has only used $8.5 billion -- or 45% -- to pay out its dividend. That means the dividend is eminently safe if business slows down, and there is tons of room for the dividend to grow. Perhaps that's why the company has been able to easily raise its dividend every year for over a decade.
Brian Feroldi: I think that the pharmaceutical giant AbbVie is an intriguing choice for retirees because it features a unique combination of growth, value, and income that investors in their golden years might find attractive.
AbbVie offers investors a strong chance at growth over the coming years, thanks to its three current top-selling drugs: Humira, Imbruvica, and Viekira Pak. Sales of these drugs topped $16.5 billion in 2015, and management has announced ambitions plans to grow that total to $26 billion by 2020. When adding in the rest of AbbVie's currently marketed drugs and its extensive pipeline, management anticipates total sales to exceed $37 billion five years from now. If the company can get close to that goal, then earnings per share have a good shot at growing at a double-digit rate over that time period, which is solid growth for a company of AbbVie's size.
Despite management's upbeat forecast, the market currently doesn't seem to believe that the company can deliver and has pushed the company's price so low that it is currently trading for less than 11 times 2016 earnings estimates. The reason for the disconnect has to do with the market perception that incoming biosimlliar approvals will threaten Humira's chance at growth. That is a potential risk, but the company's management team has expressed confidence that Humira is protected from competition into the early 2020s.
The share price drop has also pushed up the company's generous dividend yield -- which has grown every year since it split from its former parent Abbott Laboratories (NYSE: ABT) in 2013 -- to more than 4% today.
If the company can deliver results anywhere close to its stated targets, shareholders who get in today have a good shot at banking a strong dividend yield and have the potential for big share price appreciation.
Selena Maranjian: One appealing stock for retirees to consider buying is Realty Income. It's a real estate investment trust (REIT) and so must pay out at least 90% of its income as dividends. Thus, it sports a solid dividend that recently yielded 4.3% -- and that payout has increased by an annual average of about 7% over the past five years, via more than 80 increases since 1994. Realty Income makes monthly payments, too, instead of the more conventional quarterly ones.
So what does the company do? Well, it owns, operates, and leases real estate properties -- close to 4,500 of them. It does so very well, too, with overall occupancy rates recently topping 98% -- and never having dipped below 96%. About 80% of its properties are retail ones, with top tenants including Walgreens Boots Alliance (NASDAQ: WBA), FedEx (NYSE: FDX), and Dollar General (NYSE: DG). Close to 13% of its properties are industrial, and 6% are offices. Better still, no single tenant generates more than 7% of its revenue, giving its income a little more stability through diversification. Its properties are distributed geographically, too, across 49 states and Puerto Rico.
Realty Income is a solid choice for retirees seeking income. If its payout keeps rising over the coming decade at 5% annually, it will yield about 7% on the amount you invest in it today. Most of its tenants have signed long-term leases that include rent increases, and they are often also expected to pay for maintenance, taxes, and insurance, too. That removes much risk from Realty Income and leaves it positioned to collect regular rent checks. Since most of its tenants are retailers, they won't consider moving easily, either, as that would be disruptive to their customers. If you seek income in retirement, give this stock some consideration.
As you plan for your retirement, don't expect Social Security alone to keep you afloat. The average annual retirement benefit was recently just $16,000. Even if you can double that by having earned more than average and employing smart Social Security strategies, it likely won't be enough. Give dividend-paying stocks serious consideration, as they can be a great support in retirement.
Brian Feroldi has no position in any stocks mentioned. Brian Stoffel has no position in any stocks mentioned. Selena Maranjian owns shares of Realty Income and Verizon Communications. The Motley Fool recommends FedEx and Verizon Communications. 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.