I spend a lot time thinking about my investments. It sort of comes with the job description. But when I eventually retire, I don’t intend to spend my days with my eyes glued to a monitor. I want to retire with my mind at ease and with a steady stream of cash coming in.
To start, it absolutely must pay a respectable dividend. I buy plenty of stocks that do not pay dividends, and there is nothing wrong with that.So, what are some of the qualities I would look for in an ideal retirement stock?
Young, fast-growing companies generally have more pressing needs for their cash. But any stock I would feel comfortable holding in retirement needs to be mature enough to pay a dividend — potentially for decades.
Furthermore, that dividend should grow every year, or at least very regularly. A stock that doesn’t grow its dividend is essentially a risky bond with no set maturity date. The income it throws off won’t keep pace with inflation.
And finally, the stock should have survived a good crisis or two without cutting its dividend. If you’re planning on living off dividends, you need to have faith that they’re going to be there for you when you need them.
So with no more ado, let’s jump into my list of seven stocks to fund a happy retirement.
I’ll start with “the monthly dividend company,” blue-chip retail REIT Realty Income (O).
I write about Realty Income a lot. In fact, I may actually write about Realty Income more than any other stock.
And there is a solid reason for that: I consider it one of the very best dividend stocks a retiree can own. It’s about as stable and conservative as a bond while still offering regular dividend growth. Realty Income has paid 539 consecutive monthly dividends, and has raised its dividend for 71 consecutive quarters.
Not every dividend hike is newsworthy, but Realty Income has managed 5% compound annualized dividend growth for 20 years and running. That’s well ahead of inflation and certainly enough to guarantee a happy retirement.
So, what is the secret to Realty Income’s stability?
Realty Income isn’t really a “company” as you might think of one. It’s a passive landlord with a portfolio of more than 4,300 properties. As a triple-net REIT, the tenants are responsible for all maintenance, taxes and insurance, and Realty Income has a long history of leasing to stable tenants.
Realty Income’s stock price has faltered in 2015, falling in sympathy with bonds and other income-producing assets. If you’re looking to retire happy, use this as a buying opportunity in one of America’s finest divided payers.
Along the same lines, we have one of the bluest of blue-chip REITs, Ventas, Inc. (VTR).
With a market cap of $21 billion, Ventas is one of the largest holdings in most REIT index funds, and it’s one of the few REITs to make it into the S&P 500.
With Ventas’ size comes stability and financial strength, but that doesn’t mean that Ventas is wanting for growth. The stock has generated total returns of about 26% per year over the past 15 years.
As a diversified health REIT, Ventas is a nice play on the aging of the Baby Boomers. About half of Ventas’ portfolio is invested in senior housing. Another 18% and 17%, respectively, is invested in medical office buildings and skilled nursing facilities with the rest invested in hospitals and assorted loans and other properties.
After the general selloff in the REIT sector, Ventas now sports a very attractive dividend yield of 5%. And importantly, Ventas is also a serial dividend raiser. Ventas has grown its dividend at a 7.9% annual clip over the past five years and an 8.0% clip over the past 10 years.
A demographically-favored portfolio with a long history of raising dividends? If that isn’t a stock to help you retire happy, I don’t know what would be.
My next “happy retirement” stock is the seller of the Happy Meal:McDonald’s (MCD).
In this age of organic eating, McDonald’s has become something of a pariah stock. It hasn’t quite reached the notoriety of Big Tobacco … or even of agribusiness giant Monsanto (MON). But it’s hard to find a company more disdained by the chattering classes than good ol’ Mickey D’s.
But remember, tastes are always changing in America, and this is not the first time that McDonald’s has been distinctly out of style. McDonald’s is a survivor, and as Americans’ tastes have changed, so have McDonald’s menu offerings.
So, why do I like McDonald’s as a happy retirement stock?
More than anything, it comes down to the dividend. McDonald’s has raised its dividend every year since 1977, and its dividend has grown at an eye-popping pace over the past decade. Over the past 10 years, McDonald’s has grown its dividend at a 19.5% clip. Dividend growth has been a little more modest recently, growing at a 9% clip over the past three years.
But 9% growth is just fine in my book. McDonalds is a champion dividend payer, and you can buy it today with a 3.5% dividend yield.
Unless you read about it from me, chances are good that you’ve never heard of StoneMor Partners, LP (STON). StoneMor is in a line of work that a lot of people find downright creepy. It owns and operates 303 cemeteries and 98 funeral homes across the United States and Puerto Rico.
In our golden years, there are a lot of things we’d prefer to think about other than caskets and tombstones, but Stonemor’s dividend is far from gloomy. At current prices, it yields about 8.2%.
StoneMor consistently raises its dividend, though the rate of growth is a little more modest than for some of the other companies I’ve mentioned. Over the past five years, it has raised its dividend at a 1.9% clip. That’s nothing to write home about, but I will add that it is has more than kept pace with inflation over the period.
I expect that the growth rate is about to pick up. Based on current life expectancies, the number of annual deaths in America will rise by more than 80% between 2015 and 2035, due to the aging of the Baby Boomers. Even allowing for an increased preference for cremation over traditional burial, there is an incredible amount of growth all but guaranteed.
If you want to retire happy, buy StoneMor and collect the dividend.
Kinder Morgan Inc
Next up is oil and gas pipeline operator Kinder Morgan Inc (KMI), one of my very favorite dividend stocks.
Kinder Morgan owns and operates the largest network of oil and gas pipelines in North America, and with its size comes stability and diversification. So long as America needs oil and gas moved from point A to point B, Kinder Morgan should do quite nicely.
Whenever I invest, I like to know who’s running the show. No matter how great a company looks on paper, you still have to trust that the people running it are competent and honest.
Well, Kinder Morgan is run by one of smartest men in the energy industry, Richard Kinder, who also happens to be one of the “good guys” in corporate America. Kinder receives no salary for his work as chairman, and he even reimburses the company for his health insurance. His only compensation comes from the dividends he receives as a shareholder, though as the owner of 234 million shares, Mr. Kinder is doing just fine. He takes home $400 million per year in dividends.
At current prices, Kinder Morgan sports a dividend yield of 5.1%, and management expects dividend growth in the ballpark of 10% over the next five years.
Enterprise Products Partners
Along the same lines, we have Enterprise Products Partners (EPD), the only MLP that can rival Kinder Morgan in terms of size, scope, and diversification. Enterprise Products operated 51,000 miles of oil and gas pipelines in additional to extensive salt-dome storage capacity and marine transportation.
Anything energy related is going to give investors heartburn these days, but most of Enterprise Products’ income is fee-based, depending on the volume of oil and gas transported rather than the price.
After a fantastic run since 2008, EPD stock has hit the skids since last September and is now down by more than a quarter from its 52-week high. Given its current size, Enterprise probably can’t realistically generate the kinds of returns going forward that investors have become accustomed to.
But with a current distribution of 5% and a long history of raising that distribution, Enterprise looks like a decent bet at today’s prices.
And finally, we get to the ultimate oil major, ExxonMobil (XOM). I should be clear that I don’t expect ExxonMobil stock to do much over the next few months. Exxon is down about 20% from its 52-week highs set before last year’s oil-price collapse, and I expect it to recover nicely … eventually.
But for that to happen, the price of energy needs to stabilize, and that may very well take a while.
In the meantime, investors would be wise to average in to Exxon on any large dips. Exxon is one of the safest dividend payers in existence, having raised its dividend for 32 consecutive years and counting. Exxon even managed to continue growing its dividend during the dark days of the 1980s and 1990s, when energy prices slumped into a two-decade bear market.
At today’s prices, Exxon yields about 3.5%. And over the past decade, Exxon has raised its dividend at a 10% annual clip.
Is that kind of growth realistic with oil priced where it is today? Probably not. But even if dividend growth comes in at half that rate over the next decade, that’s still pretty solid and more than enough to ensure a happy retirement.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.