Preparing for retirement can be quite challenging. If you are a prospective retiree, you need to ensure that you have enough sources of income on which you can comfortably rely on. Pensions and Social Security can provide a steady paycheck. However, most of the time, these sources of income are just not enough to live stress-free and experience the best of life. Hence, many retirees rely partially or solely on stocks for additional dividend income.
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Here’s where the real challenge arises. While stocks can be a tremendous source of supplemental income, picking the right names can be tough. Unlike, say, government bonds, there is no guarantee that a company will keep paying out dependable dividends. This is important since, as a retiree, your margin of safety is thinner than that of a young investor who has the luxury of undertaking additional risk.
For this reason, I have chosen three key criteria which you can use when picking dependable stocks. I then suggest some names that satisfy these traits, which you can potentially consider when constructing your retirement portfolio. Let’s go:
1. A Prolonged Dividend-Growth Track Record
Stocks that already feature a prolonged dividend-growth track record are a great place to begin. By prolonged track record, I define a period of 25 years. By satisfying this trait, these companies have already proven they can not only maintain but grow their payouts even during the harshest economic environments. These include the Great Financial Crisis, the COVID-19 pandemic, and other periods of elevated economic uncertainty.
Hence, you can sleep well at night knowing that these companies have already survived hardships and have actually come out stronger.
2. Dividend Growth That Exceeds 5% Per Annum
This is a subjective point. Some retirees may be happy to receive stable dividends. However, in the current market environment, stagnated dividend payouts are just not enough. Why? Well, with inflation raging, if your dividends remain the same but prices of goods and services are on the rise, your purchasing power is on the decline.
As a retiree, you want to make sure that your purchasing power is at least maintained, if not increasing. Otherwise, you may find yourself five or ten years down the road unable to afford goods and services you previously could. Selecting stocks that have historically grown their dividends at a pace north of 5% (over the past five years, in our case) should ensure that this doesn’t happen, even if inflation remains at above-historical levels.
3. A Well-Covered Dividend That Yields at Least 2%
A stock that features a prolonged dividend-growth track record and a 5%+ dividend growth pace could still not fit a retiree’s portfolio if its yield is miniature. There are many such quality companies that can be fruitful investments but just not good for adequate income generation. Thus, I have set the minimum dividend yield threshold at 2%.
Simultaneously, a stock that features an above-average or very high dividend yield does not make for a good candidate either if its dividend is not well-covered. Therefore, I am looking for stocks whose payout ratios are below 75%. This also goes back to our previous criteria, as we want to make sure the stocks in a retiree’s portfolio have adequate room ahead to keep growing their dividends comfortably.
Combining the Above Criteria!
If we combine the above criteria and apply our requirements to every single stock in the market out there, we come out with the ultimate list of top dividend stocks to prepare for retirement. Click on the links to learn more about the individual stocks. Here’s the top dividend stocks list:
| Name/Ticker | Years of Dividend Increases | Dividend Yield | Five-Year Dividend Growth (Annualized) | Payout Ratio |
| Abbvie Inc (NYSE: ABBV) | 51 | 4.0% | 14.71% | 74.0% |
| A.O. Smith Corp. (NYSE: AOS) | 29 | 2.0% | 10.76% | 36.0% |
| Air Products & Chemicals Inc. (NYSE: APD) | 40 | 2.2% | 11.26% | 61.4% |
| Automatic Data Processing Inc.(NYSE: ADP) | 48 | 2.0% | 10.54% | 57.2% |
| Caterpillar Inc. (NYSE: CAT) | 29 | 2.0% | 9.00% | 33.3% |
| Chevron Corp. (NYSE: CVX) | 35 | 3.1% | 5.63% | 31.4% |
| General Dynamics Corp. (NYSE: GD) | 31 | 2.0% | 8.45% | 41.0% |
| Genuine Parts Co. (NYSE: GPC) | 66 | 2.0% | 5.80% | 41.7% |
| Hormel Foods Corp. (NYSE: HRL) | 56 | 2.2% | 6.76% | 56.4% |
| Illinois Tool Works, Inc. (NYSE: ITW) | 58 | 2.2% | 10.93% | 56.2% |
| Johnson & Johnson (NYSE: JNJ) | 60 | 2.6% | 6.11% | 60.4% |
| Lowe’s Cos., Inc. (NYSE: LOW) | 60 | 2.0% | 20.69% | 29.2% |
| McDonald’s Corp (NYSE: MCD) | 47 | 2.2% | 6.44% | 69.0% |
| Medtronic Plc (NYSE: MDT) | 45 | 3.3% | 8.13% | 67.0% |
| PepsiCo Inc. (NYSE: PEP) | 50 | 2.5% | 7.39% | 63.0% |
| PPG Industries, Inc. (NYSE: PPG) | 51 | 2.0% | 6.62% | 53.1% |
| Procter & Gamble Co. (NYSE: PG) | 66 | 2.6% | 5.78% | 63.2% |
| Sysco Corp. (NYSE: SYY) | 52 | 2.2% | 6.36% | 67.5% |
| Target Corp. (NYSE: TGT) | 54 | 2.6% | 11.74% | 42.0% |
| Atmos Energy Corp. (NYSE: ATO) | 38 | 2.4% | 6.99% | 48.8% |
Final Thoughts
The stocks in the above table are considered blue-chip companies, which have delivered tremendous shareholder value creation through the decades. Due to the unique elements they satisfy, I believe they are quite fit to meet the needs of those preparing for retirement.
Nevertheless, make sure you conduct your own due diligence before buying any security, and most importantly, make sure your holdings are well diversified. This is critical for a healthy retirement portfolio. Happy retirement!
