It's never a bad time to start preparing for your retirement. The reality in this perpetually low interest-rate environment is that retirees need to have a good chunk of their portfolio tied to stocks to earn higher total returns.
Conservative investors who don’t want to add too much risk to their portfolios will need to identify good quality stocks that have the ability to recover from downturns and still continue to provide a regular income.
In the dividend-paying segment of the market, sometimes it makes sense to focus on what some traders may view as boring, old-economy businesses, such as power and gas utilities, key infrastructure providers, and banks and insurance companies — companies that go on paying dividends through the thick and thin of the market.
1.Toronto Dominion Bank
Canadian banks are among the best dividend-paying stocks in North America. What makes them different from their peers south of the border is less competition, a sound regulatory environment, and their diversification.
They operate in a kind of oligopoly where competition is limited, and the regulatory environment is extremely favorable for growth. Canada’s top lenders have been very consistent in rewarding investors through steadily growing dividends, on which they spend about 40%-50% of their income.
In this group, I particularly like Toronto Dominion Bank (TSX:TD), Canada’s second-largest lender. It has a very attractive dividend policy, supported by strong growth momentum, and a significant retail-banking operation in the U.S. Indeed, TD has more retail branches in the U.S. than in Canada, with a network that stretches from Maine to Florida.
Overall, TD generates about 30% of its net income from its U.S. retail operations. The bank also has a 42% ownership stake in TD Ameritrade (NASDAQ:AMTD) with a fast-expanding credit card portfolio.
After a 10.4% increase in its payout in February, income investors in TD stock now earn a $0.56-a-share quarterly dividend, which translates into a 3.86% yield. The bank is forecast to grow its dividend payout between 7% and 10% each year going forward — an impressive growth rate at a time when the 10-year government note is yielding less than 1.69%. TD stock, after gaining 16% this year, was trading at $57.68 at close yesterday.
2. Dow Inc.
The newly established Dow Inc (NYSE:DOW), after its recent spin-off from parent DowDuPont Inc., is offering a very attractive income-generating opportunity for retirees.
Dow shares began trading on April 1 after the old Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) announced a grand $120-billion merger in 2017, with an intention to create three separate entities, focusing on agricultural products and a specialty chemicals company.
The third one became Dow, entirely focusing on material sciences, plastics and silicones. What makes it a compelling income-generating opportunity is the chemical producer’s clear focus to return most of its income back to investors in the shape of dividends and share buybacks. According to the company’s presentation to investors, the new Dow will pay out 65% of its net income to shareholders each year through stock buybacks and a hefty dividend.
Its stock currently pays $0.7 dividend a share, with an annual yield of about 5.8%. With the targeted payout ratio of 45% of the company’s net operating income, that dividend is quite conservative.
That said, investors should be aware that plastic, being a derivative of oil, is a cyclical business where demand and supply is closely tied to the global economic growth and other macro influences. That’s the reason that its stock fell about 4% this year as trade fight between the U.S. and China hurt demand for industrial products. Its stock closed yesterday at $47.91.
3. Enbridge Inc.
Utilities is another area where you can get a good income stream if you remain invested for the long-run. North America’s largest pipeline operator, Enbridge Inc (NYSE:ENB) could be a good fit for your income-generating portfolio, with its massive moat and its crucial position in North America’s energy supply chain.
Enbridge is also a good defensive stock to hold on to when the economic headwinds are gathering pace. The company pays $0.55 a share quarterly dividend with an annual dividend yield of 6.28%. The payout is expected to rise 10% per year as the company completes its many development projects and benefits from Canada’s very tight pipeline capacity.
Over the past two years, Enbridge has been carrying out a restructuring plan, selling assets, focusing on its core strengths, and paying down its debt. These measures are likely to benefit long-term investors whose aim is to earn steadily growing income.
Enbridge stock, up 13% to date in 2019, closed at $35.15 yesterday in New York.
Bottom Line
Adding solid dividend stocks to a portfolio could create a sustained income stream to rely on during retirement. Investors should slowly start building their portfolios when the prices are attractive. If they continue to re-invest payouts to buy more shares of these companies, they'll thus also unlock the powerful process of compounding.