Investing in income-producing stocks is an ideal strategy for those seeking to earn extra cash during retirement. Of course, dividend-paying stocks aren't sexy, and the shares alone won't make you rich, but they often belong to a mature group of companies in stable markets that don’t stop returning cash to investors, often by boosting dividends, even during the worst economic times.
The big challenge, though, is to identify the right stocks. One way is to focus on the high-quality companies in the S&P 500 with at least 25 years of dividend growth, known in the market as “Dividend Aristocrats.” While good historical performance doesn’t guarantee that companies in this group will continue to provide you cash streams going forward, this is still a much safer bet than picking names with no track record.
The dividend stocks below are two examples we think are worth considering as additions to your retirement portfolio:
1. 3M: Cash Machine for Long-Term Investors
The shares of one of the world's largest industrial conglomerates, 3M (NYSE:MMM), are certainly not a buy if your investing objective is to see quick gains and move on to the next growth stock. The future outlook for this industrial giant is becoming uncertain amid the many powerful headwinds threatening the global economy, and any prolonged economic weakness has the potential to hurt the demand for its products.
But what if all you want is to earn steadily growing income? On this criteria, the maker of Post-it notes and touch screens has an excellent track-record. The company has raised its dividend every year between 1962 and 2018. This impressive run of dividend growth suggests that the company has the power to endure recessions, demand weakness and other turbulence along the way.
Trading at around $212 a share at yesterday's close, 3M stock is down about 17% from the record high reached in January last year on concerns that rising costs and a slowing global economy will hit its earnings. But this temporary slip also allows long-term income investors to lock-in its dividend yield of close to 3% and earn growing payouts year after year. The company will pay a quarterly dividend of $1.44 per share on March 12, up almost 6% from the $1.36 per share paid in the same period in 2018.
2. Procter & Gamble: Owner of Powerful Consumer Brands
Procter & Gamble (NYSE:PG), the maker of Crest toothpaste, Tide laundry detergent and Bounty paper towels among other well known consumer brands, has one thing in common with 3M: the unique ability to produce recurring cash flows from their large number of brands. No matter what cycle the economy is entering, companies like P&G will continue to sell toothpaste and detergent and generate cash for its investors. The world’s largest consumer product company is also one of the largest dividend payers in the sector.
The maker of Dawn dish soap and Pampers has hiked its dividend for 62 consecutive years. Over the past 128 years it has never stopped paying dividends, making money during recessions, wars and droughts. With a current dividend yield of 2.98%, P&G stock pays about $0.72 a share each quarter. This remarkable history of payouts makes this consumer stock a dependable source of passive income for retirement portfolios.
The shares closed down 0.3% at $104.66 yesterday, but they've risen almost 34% in the last 12 months, 28% over the past 5 years. Consumer staple stocks like P&G may not always produce the explosive gains seen in some of the growth stocks, but keeping them in your cash-generating portfolio eliminates the need to worry about the daily market volatility. Once you buy them, you don’t sell them, but sit back and watch them earn regular dividend income.
Bottom Line
It’s not hard to generate a steady stream of passive income in your retirement if you start saving early and use a portion of these savings to buy dependable income stocks, such as 3M and P&G. Researchers at the Stanford Center on Longevity project conclude that, in order to retire at age 65 and maintain your standard of living, you need to put 10%-17% of your current income into a retirement account. And that’s if you start saving as early as age 25. As the years tick by and you keep re-investing dividends back into your income portfolio, you’ll realize how quickly your nest egg grows, generating sizeable monthly cash flows for you.