12 Dividend Stocks for Retirement—and How to Find More (2024)

His father, King says, had been an active investor. But a steady dividend stock portfolio was much more suitable for his mother, “a retiree who didn’t follow or understand financial markets,” recalls King, a senior portfolio manager and head of income and growth strategies at Columbia Threadneedle Investments. The income from the dividend payments, along with distributions from her other holdings, would fund her living expenses for years.

Dividend stocks can be—and for a growing number of investors are—part of a well-balanced retirement portfolio. Well-chosen dividend stocks can help mitigate the effects of market downturns or add juice to rallies, delivering quarterly income that cuts losses and amplifies gains. They can also be a hedge against inflation—a big concern lately as food and energy prices have spiked—with some of the best companies increasing payouts annually for decades.

“To have a retirement portfolio that has a significant component of stocks with attractive dividends makes a tremendous amount of sense,” says David Giroux, a portfolio manager at T. Rowe Price who manages the firm’s capital-appreciation strategy. “If the average company in the market can grow its earnings at 7% to 8% a year, your dividends should be growing at a similar rate.”

While savers need such income and growth to cover what can be a decadeslong retirement, this approach isn’t foolproof and certainly isn’t for everyone. Investors who pursue dividend stocks for income also risk losing principal or even part of the payout if there’s an economic or business downturn. And younger investors could be forgoing the longer-term potential of growth stocks by pursuing a dividend strategy. Savers also should consider a number of other potential sources of retirement income—bonds are one option, their overall low yields notwithstanding.

So what to look for when carving out a portion of your retirement portfolio for dividend stocks? Financial professionals say there are a number of metrics to consider, from yields to payout ratios. The experts Barron’s spoke with say building a dividend-stock portfolio boils down to three D’s: diversification, downturn-resistance, and doing due diligence.

Diversity in Dividends

Stephanie Link , chief investment strategist and portfolio manager at Hightower Advisors, suggests a portfolio that’s diversified across sectors and companies with plenty of excess cash to buy back stock. While buybacks don’t put cash directly in investors’ hands, they’re part of a stock’s shareholder yield.

She recommends holding “accidentally high dividend yielders,” like 3M (ticker: MMM). The manufacturing conglomerate has seen its shares drop by about 20% over the past 12 months, and they now yield 4.1%, since yields tend to rise as prices fall.

Accidental high yielders like 3M, Link says, are down “from their highs, for whatever reason, and they are starting to yield 3% to 4%. But you know their balance sheets are strong and that they can cover those dividends,” while investors wait for their share prices to rebound.

“Simple diversification, say eight stocks in eight different sectors, is actually very, very important,” says Columbia Threadneedle’s King. “You don’t have to be insane with your diversification, but I would recommend more than a handful, certainly more than five—and one per broad sector.”

Link eschews stocks yielding 5% or 6%, as high yields can often be a sign of distress and indicate a dividend at risk. “And you don’t necessarily want the 1s and 2s,” she says, referring to their yields. “So it’s that 3% to 4% yield that’s kind of in the sweet spot.”

She also likes steady-eddy stocks for such portfolios, among them Coca-Cola (KO), Emerson Electric (EMR), and (JNJ). Those stocks yield 3%, 2.2%, and 2.4%, respectively. They are all constituents of the S&P 500 Dividends Aristocrats Index, whose members have paid out a higher dividend for at least 25 straight years.

Downturn-Resistance

The Aristocrats index, with its 65 members, is a good place to look for reliable and durable dividend-paying stocks for retirement.

“You need to look at the history of the dividend payout,” says Jenny Harrington, CEO and portfolio manager at Gilman Hill Asset Management. Harrington also looks closely at a company’s payout ratio—the percentage of earnings that get paid out in dividends—to make sure it’s sustainable during downturns.

A solid payout ratio, she says, augurs well for a stock over the long term and can show that a company’s management “philosophically has a strong commitment to delivering total shareholder return in the form of dividends.” Ratios above 75% deserve “a bit more scrutiny…to understand why and how the dividend is sustainable,” she adds.

Among income stocks she likes for retirement portfolios are Verizon Communications (VZ), which was recently yielding 4.9%; IBM (IBM), 5.2%; and energy giant Chevron (CVX), 3.6%. She also likes 3M.

Brian Bollinger, founder of the newsletter and website Simply Safe Dividends, agrees with Harrington on the need to put together a retirement portfolio of income-generating stocks “that can withstand a downturn without jeopardizing their payouts.”

March 2020, when Covid-19 took hold in the U.S., is a good example of the need to seek dividend payers with enduring or essential businesses. The broad commercial shutdowns early in the pandemic led to numerous dividend cuts and suspensions, even among consistent payers like Boeing

(BA) and Walt Disney (DIS).

“That’s really the goal in retirement—to preserve your capital and preserve your income streams so you are not left panicking and scrambling and making a really bad decision that can have a long-lasting effect,” Bollinger says.

Do Due Diligence

In looking for stocks to hold in such a portfolio, King of Columbia Threadneedle cautions against relying too heavily on Wall Street research. “If you say, ‘Give me a good investment idea for the next 10 to 20 years,’ that’s not their focus,” he says.

He emphasizes looking at “classic backward-looking factors” such as a company’s credit rating or management reputation to help get a sense of how reliable a dividend is.

Not everyone thinks a retirement stock portfolio should be all-in on dividends. “You have to really be careful about pigeonholing yourself into just dividend stocks to the exclusion of growth stocks,” says Peter Krull, CEO and director of investments at Earth Equity Advisors. “Because without some growth, you might end up coming up short.”

The firm’s focus includes sustainable investing, something that doesn’t always line up with value-oriented dividend stocks, Krull says. “You have to be really selective about the sectors that you look at,” he says, adding that he won’t invest in any fossil fuels companies “despite what their dividend may be.”

Still, there is equity income available in the world of sustainable investing, including some real estate investment trusts that “have really made a transition into pushing their buildings to be more energy and water efficient,” Krull says. An example is Alexandria Real Estate Equities (ARE), a REIT whose tenants are in life sciences, technology, and other areas. The stock yields 2.4%.

While that yield is reasonable, financial experts also warn of yield traps and say retirees should avoid stretching for too much income without exploring why a yield is high. “Sometimes people, especially retail investors, look at a dividend yield but they don’t spend enough time asking the question, ‘Is that dividend yield sustainable?’ says T. Rowe Price’s Giroux, a member of the Barron’s Roundtable.

King, meanwhile, recalls that not every stock worked out in the portfolio he set up for his mother. Merck (MRK), for example, treaded water for many years.

Still, Merck’s dividend was secure and, overall, the portfolio did what he originally envisioned: “Increase in value more than inflation, provide income, and growth of income.”

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Alexandria Real Estate Equities

Real estate investment trusts, which are required to distribute at least 90% of their taxable income to shareholders, are worth a look for a retirement portfolio. One to consider is Alexandria Real Estate Equities, which yields 2.4%. The company owns various office buildings that cater to companies in biotechnology, agricultural tech, and pharma, among other areas—all of which are solid bets for long-term dividend investors. The company declared a quarterly dividend increase of nearly 3% to $1.15 a share—having previously boosted it by about the same percentage in June.

Chevron

Unlike rival Exxon Mobil , whose dividend looked like it could be cut in recent years amid a weak global energy market, Chevron managed to steadily increase its distribution over that time. In contrast, when Exxon Mobil declared a dividend increase in October, it was the first time it had done so in 2½ years. CEO Michael Wirth said during the company’s investor day earlier this month that “we expect to generate more cash to support a growing dividend.” No doubt, rising oil prices have been a nice tailwind for Chevron’s capital returns, including its dividend.

Coca-Cola

In recent years, the company has raised its dividend at a low single-digit clip, nothing to write home about. But Coca-Cola has been the picture of dividend consistency, increasing its payout for 60 straight years. What’s more, the company’s share-buyback authorization totals $10 billion. “It’s a nice combination,” says Stephanie Link of Hightower Advisors, referring to the company’s capital-return options. Analysts polled by FactSet expect the company to earn $2.46 a share this year, up about 6%. The beverage maker’s free cash flow totaled $11.3 billion last year, up from $8.7 billion in 2020. Together that bodes well for dividend growth.

Colgate-Palmolive

The consumer-products company, known for brands such as its namesake toothpaste and Speed Stick deodorant, is about to raise its annual dividend for the 60th straight year. The company’s board earlier this month declared a quarterly disbursem*nt of 47 cents a share, up 2 cents, or about 4%—well below the surging inflation rate. Nevertheless, last year’s free cash flow totaled $2.8 billion, more than covering the $1.7 billion of dividends paid. Inflation isn’t expected to stay at this level for long, but the prospects of Colgate-Palmolive continue paying and boosting its dividend every year look like a good long-term bet.

Johnson & Johnson

Few companies can match Johnson & Johnson for the longevity and consistency of its dividend—a good combination for a dividend retirement holding. The healthcare conglomerate put through a quarterly dividend increase of 6% to $1.01 a share in April 2020 when many companies were suspending or cutting theirs owing to the pandemic. In April 2021, the company boosted it again to $1.06 a share, marking the 59th straight year in which the quarterly payout has been raised. Speaking at an investor conference in January, CEO Joaquin Duato said, “We’re going to have the flexibility and muscle to continue to grow our dividend.”

JPMorgan Chase

Now that it has moved past Covid-related restrictions on dividend growth imposed by the Federal Reserve, the country’s largest bank by assets has its payout on a good trajectory. In the fall, the company boosted its quarterly dividend to $1 a share, up 11%. The bank’s longtime CEO, Jamie Dimon, “will retire someday, but I’m confident there will be a great successor,” says Dave King of Columbia Threadneedle Investments, adding that the stock has a solid yield and a “great record of growing dividends.” The shares, down about 12% this year, are trading around 12 times the $11.27 a share analysts polled by FactSet expect it to earn this year.

NextEra Energy

Utilities are popular among equity income investors. NextEra Energy , however, offers two plays in one. Its holdings include FPL, a regulated utility in Florida—an attractive growth market, especially when compared with parts of the Northeast and Midwest. NextEra is also a major player in alternative energy, notably wind and solar. These alternatives diversify its revenue mix and help solidify the dividend. In February, the company’s board declared a quarterly dividend of 42.5 cents a share, an increase of about 10%. It’s the latest in a series of double-digit dividend increases that make life easier for retirees.

Procter & Gamble

The consumer-products behemoth, whose signature brands include Crest toothpaste and Tide laundry detergent, proved its mettle early in the pandemic, raising its quarterly payout by 6% to 79.07 cents a share in April 2020. It boosted it again nearly a year ago, in that instance by 10%, to almost 87 cents a share. The company’s adjusted free cash flow totaled $15.8 billion in its most recent fiscal year, which ended in June, up from $14.9 billion in fiscal 2020. In January, the company said it expects earnings this fiscal year, which ends in June, to increase by 6% to 9%—likely paving the way for a bigger dividend.

Prologis

This REIT, which yields about 2%, offers investors a play on global e-commerce, thanks to the company’s portfolio of warehouses. It’s a business that has staying power for those thinking about it as a long-term holding, in particular its dividend. The yield isn’t as high as those of many REITs, but it has increased its dividend at a good clip. The company’s board in February declared a quarterly distribution of 79 cents a share, up 25% from 63 cents. For now, Prologis is in growth mode, plowing a lot of its capital back into the company. Besides offering a reliable yield, this stock has a three-year annual price gain of about 28%.

Target

The retailer is a serial dividend booster, having done so for 50 straight years—most recently in June. The company will continue “to focus on growing the annual dividend,” CFO Michael Fiddelke told analysts during the fiscal fourth-quarter earnings call on March 1. He added that Target plans to recommend later this year that its board approve a per-share dividend increase in the 20% to 30% range “as we continue to move toward a 40% payout ratio over time.” During the previous fiscal year, Target declared dividends of $3.38 a share on earnings of $13.56. That’s a payout ratio of around 24%, leaving room for dividend hikes.

Union Pacific

Union Pacific ’s dividend keeps rolling along. The freight railroad boosted its quarterly disbursem*nt late last year to $1.18 a share, an increase of about 10%. It declared a similar increase in May. At 1.8% the stock’s yield isn’t all that exciting. However, Stephanie Link of Hightower Advisors regards this as a dividend-growth play more than a straight play on yield—an important component of a retirement portfolio. The company’s dividend payout is smaller than its share repurchases—$2.8 billion versus $7 billion in 2021. “But with strong free cash flow, they remain consistent on shareholder returns,” Link says.

Verizon Communications

This stock offers a nice yield of around 5%, but the trade-off is that the dividend has been growing slowly. It was most recently raised in September, by 2% to 64 cents a share. Jenny Harrington of Gilman Hill Asset Management says heavy investments in 5G could help earnings growth, which she expects to be modest in the near term. Analysts polled by FactSet are looking for the telecom’s earnings to come in at $5.46 a share this year, up a bit from $5.39 in 2021. Still, “this is a lot better than a bond,” says Harrington. Free cash flow last year dropped to $19.3 billion from $23.6 billion in 2020 but there’s plenty to pay the dividend.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com