If your investment objective is to build a strong portfolio that will produce a steady stream of income during your retirement, then buying quality dividend stocks should be part of your strategy.
The model portfolio—which generally consists of 60% stocks and 40% bonds—hasn’t lost its utility for long-term investors. Such a portfolio has climbed 13% year-to-date, according to Bloomberg data, a performance that is in line with the rally in the S&P 500 Total Return Index and bigger than the 3.5% gain in the HFRX Global Hedge Fund Index.
To help you get started on this journey, we have short-listed three quality names that investors aiming to build a retirement nest egg should consider. They're from different sectors, but they have one thing in common: they can produce consistent income even in rough seas. Let’s take a deeper look.
1. Microsoft
While picking a quality stock for your retirement portfolio, one of the most important factors is stability in dividend income in both good and bad times. Microsoft (NASDAQ:MSFT) is one such stock that perfectly fits this requirement.
Many investors mistake Microsoft for just a pure technology play in great growth mode. But if you dig a little deeper, the company also has terrific income appeal. Microsoft has an excellent track record when it comes to rewarding investors.
Microsoft 1-Year Chart.
During the past five years, Microsoft has delivered about 10.5% growth in its payout per year, supported by a low payout ratio and strong underlying businesses. With an annual dividend yield of just over 1%, Microsoft pays a quarterly dividend of $0.56 per share.
That yield may look meager to many investors, but don’t forget that Microsoft is still growing, while offering great upside potential, too. Including dividend payments, Microsoft has delivered 290% in total returns over the past five years.
Going forward, there is a good possibility this Washington-based company will keep boosting its payout as its growth momentum continues. During the pandemic, demand surged for its cloud-computing services, video gaming and computers, helping the company to make massive profit.
If you are investing for retirement, you need to find companies like Microsoft to stash in your portfolio. These are the giants that have the power to defend their businesses and pay you for the rest of your life.
2. Home Depot
Home Depot (NYSE:HD) is one of those stocks that are best-positioned to continue sending dividend checks to retirees. This home-improvement giant’s quarterly dividend has expanded about 23% per year during the past five years, and with a healthy payout ratio of 50%, it has much more room to grow. With an annual dividend yield of 2.17%, the company pays a $1.50 per share quarterly payout.
Home Depot 1-Year Chart.
Since the pandemic outbreak, the Atlanta-based retailer has posted strong earnings growth as the stay-at-home environment fuels demand for home improvement products. In the most recent quarter, which ended Nov. 2, HD generated $33.54 billion in sales, up 23% from a year earlier. Same-store sales grew by 24% year-over-year, and by 25% in the U.S.
Analysts expect this trend will continue as people move to suburbs and the real-estate market is likely to remain strong.
Home Depot is one of those retailers that are best-positioned to survive the ongoing onslaught by the e-commerce disruptors, like Amazon.com (NASDAQ:AMZN). With 90% of Americans already living within 10 miles of a Home Depot store, rather than opening new locations, the company is focused on upgrading its existing in-store customer base with better technology and e-commerce fulfilment capabilities.
Trading at around $277.41 as of Monday's close, HD stock isn't cheap. But its low payout ratio and accelerating business has created a lot of room for future dividend hikes.
3. Coca-Cola
The companies that generally produce regular income for retirees are the ones that hold dominant positions in their fields, have a strong brand and massive scale that's hard for competitors to reach. Atlanta-based Coca-Cola (NYSE:KO) ticks all these boxes.
Coca-Cola 1-Year Chart.
The world’s largest beverage corporation owns or licenses more than 500 non-alcoholic soft drink brands, including both sparkling and still beverages. It sells its products in more than 200 countries and has 21 individual brands that generate $1 billion or more in annual sales.
Backed by this strong portfolio that generates strong cash flows, Coca-Cola has been very consistent in paying dividends to retirees. The company has hiked its dividends for at least 50 consecutive years. History, of course, doesn’t provide a guarantee for future performance, but it can certainly tell us a lot about the business and its strengths.
That Coca-Cola has been able to increase its dividend for 57 years in a row is more than enough proof of the strength of the brand and the company’s ability to perform across a variety of economic and cultural events—recessions, downturns and changing consumer preferences.
With an annual dividend yield of 3.1%, KO pays $0.41 a share quarterly dividend. The stock is well-suited for long-term investors who need regular income to help finance their golden years.
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