Updated on August 17th, 2022 by Bob Ciura
Income investors have faced a significant challenge in recent years. Generating suitable income to live off a dividend portfolio has not been easy, as the Federal Reserve kept interest rates low for many years. And, soaring stock prices caused the average dividend yield of the S&P 500 Index to sink to multi-decade lows.
Interest rates are rising again, but even so, the average dividend yield of the S&P 500 Index is just ~1.5%.
As a result, income investors such as retirees who want to live off the dividends generated by their investment portfolios, should consider investing in high dividend stocks. However, many high-dividend stocks with yields above 5% have questionable fundamentals that mean their high dividend payouts may not be sustainable.
Income investors should try to avoid dividend cuts whenever possible. This is why we recommend income investors focus on quality dividend stocks such as the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index which have raised their dividends for 25+ consecutive years.
There are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:
At the same time, investors looking for high yields may not find the Dividend Aristocrats immediately attractive, as many of them have relatively low yields. Therefore, the task for income investors hoping to live off their dividends in retirement, is to find stocks that have a combination of a high yield and a high level of dividend safety.
With the proper research, investors can construct a portfolio that allows income investors to live off their dividends in retirement.
Table Of Contents
You can instantly jump to a section of the article by clicking the links below:
- Why Invest In Dividend Stocks For Retirement?
- What Retirees Must Avoid
- 4 Quality Dividend Stocks Yielding Over 4%
- Final Thoughts
Why Invest In Dividend Stocks For Retirement?
There are a number of different asset classes that investors can gain exposure to, in the search for higher income. One of the most popular asset classes for retirees is fixed income, otherwise known as bonds. These are debt securities issued by corporations, governments and municipalities which pay investors periodic interest, as well as principal at maturity.
Bonds are certainly a worthwhile selection for income investors such as retirees, particularly for those with a higher level of risk aversion. Bonds generally carry a higher level of safety than stocks, as bondholders are paid before common stockholders.
At the same time, stocks have certain advantages of their own. For investors who are willing to accept a higher level of risk by investing in the stock market, the trade-off is that stocks could pay higher income over the long-run.
The reason is because many quality dividend stocks raise their dividend payouts on a regular basis. The Dividend Aristocrats have raised their dividends for at least 25 consecutive years, while the Dividend Kings have increased their payouts for over 50 years. Contrast this with bonds, which will pay a fixed level of interest to bondholders (which is why bonds are called fixed income).
Consider a hypothetical comparison of an investor who allocates $10,000 into a fixed income security paying 3% a year for 30 years. In year 30, the investor will receive the same 3% payout (equal to $300) as in year 1.
Now consider the case of a quality dividend growth stock that pays a 3% annual dividend on the same $10,000 investment. In year 1, the investor will receive $300. Now assume that the stock raises its dividend by 5% per year. In year 30, the stock would pay a dividend of nearly $1,300. And, the investor would receive an even higher payout in year 30 by reinvesting dividends each year along the way.
This is the concept of yield on cost. Taking the $1,300 annualized dividend payments and dividing by the initial investment of $10,000, this scenario results in a yield on cost of 13%.
The power of dividends (and reinvesting dividends) is truly remarkable. According to a report from Hartford Funds, since 1960 approximately 84% of the total return of the S&P 500 Index was due to reinvested dividends and compounding.
Source: Hartford Funds
To be sure, retirees do not have 30 years to grow their income. But even without the benefit of a long investing time horizon, retirees can structure a quality portfolio of dividend-paying stocks that allows them to live off their dividends now.
If an investor allocates $10,000 to a portfolio of dividend stocks paying 4%, the year 1 income level would be $400. Using the same hypothetical example of 5% annual dividend growth, in 5 years the investor’s yield on cost would be an attractive 5.1%, resulting in a year 5 dividend payout of $510.
It’s fair to say that a retiree needs more than $510 in annual income to live on dividends. As a result, the typical portfolio size would need to be larger. But assuming an investor has a retirement portfolio of $500,000, a collection of dividend stocks paying 4% per year would result in a year 1 income level of $20,000.
And using the same dividend growth rate of 5% per year, this portfolio would generate dividend income of $25,525 in year 5 (again, this would be even higher if dividends are reinvested). This level of income would afford retirees a much better standard of living, especially when used in combination with Social Security benefits or other sources of income.
It is certainly not difficult finding quality dividend stocks that combine a 4% starting yield with 5% annual dividend growth. At the same time, investors must take precaution to avoid risky stocks with extremely high dividends. Stocks with elevated dividend yields above 5% are instantly appealing for income investors, but retirees must be careful with extreme-high yielders.
Such companies are often in fundamental distress, with collapsing share prices that have elevated their dividend yields to unsustainable levels. This is particularly true when it comes to certain segments of the stock market such as Business Development Companies or mortgage REITs.
What Retirees Must Avoid
The most important thing for retirees investing in the stock market, is to avoid dividend cuts or eliminations. This happens when a company is no longer able to pay the dividend at the current rate, usually due to a drop in company revenue and earnings.
The following graphic shows the historical performance of stocks broken down into several groups, which are dividend growers and initiators; dividend payers; stocks with no change in their dividend policy; stocks that do not pay dividends; and stocks that either reduce or eliminate their dividends. These groups are juxtaposed with the performance of the broader S&P 500 Index:
Clearly, the best-performing group was dividend growth stocks, whereas dividend cutters and eliminators actually lost money for their investors over the ~50 year time frame.
This shows the importance of investing in quality companies that can grow their dividends over long run, and at the same time avoiding companies that cut or eliminate their dividends.
There are a number of different asset classes that investors can gain exposure to, in the search for higher income and sustainable dividends.
The following 4 dividend stocks have current yields of at least 4%, and can reasonably be expected to grow their dividends each year.
4 Quality Dividend Stocks Yielding Over 4%
With all this in mind, the following 4 dividend stocks represent quality businesses with durable competitive advantages. These companies have proved the ability to grow their dividends each year, regardless of the overall economic climate.
They all have dividend yields above 4%, are members of the Dividend Aristocrats, and could be expected to raise their dividends for many years.
AbbVie Inc. (ABBV)
- Dividend Yield: 4.0%
AbbVie Inc. is a pharmaceutical company spun off by Abbott Laboratories (ABT) in 2013. Its most important product is Humira, which is now facing biosimilar competition in Europe, which has had a noticeable impact on the company. Humira will lose patent protection in the U.S. in 2023.
Even so, AbbVie remains a giant in the healthcare sector, with a large and diversified product portfolio.
AbbVie reported its second-quarter earnings results on July 29. Revenue of $14.58 billion rose by 4.4% year-over-year while adjusted EPS of $3.37 beat estimates by $0.06. The company lowered full-year earnings guidance to a range of $13.78 to $13.98, from prior expectations of $13.92 to $14.12 per share.
Click here to download our most recent Sure Analysis report on AbbVie (preview of page 1 of 3 shown below):
Realty Income (O)
- Dividend Yield: 4.0%
Realty Income is a retail-focused Real Estate Investment Trust (otherwise known as a REIT) that owns more than 6,500 properties. It owns retail properties that are not part of a wider retail development (such as a mall), but instead are standalone properties.
This means that the properties are viable for many different tenants, including government services, healthcare services, and entertainment.
Source: Investor Presentation
The company’s long history of dividend payments and increases is due to its high-quality business model and diversified property portfolio.
Realty Income announced its second-quarter earnings results on August 3rd. Quarterly revenue of $810 million rose 75% and beat estimates by $34 million, fueled largely by the acquisition of Vereit. Adjusted FFO-per-share increased 10% year-over-year. The company invested $1.68 billion in 237 properties during the quarter, including $694 million invested in Europe.
Click here to download our most recent Sure Analysis report on Realty Income (preview of page 1 of 3 shown below):
Leggett & Platt (LEG)
- Dividend Yield: 4.3%
Leggett & Platt is an engineered products manufacturer. The company’s products include furniture, bedding components, store fixtures, die castings, and industrial products. Leggett & Platt has 14 business units and more than 20,000 employees. The company qualifies for the Dividend Kings as it has 50 years of consecutive dividend increases.
In the 2022 second quarter, revenue of $1.33 billion rose 4.7% year-over-year. Earnings-per-share of $0.70 beat estimates by a penny. The company lowered full-year guidance, now expecting sales in a range of $5.2 billion to $5.4 billion, and earnings-per-share of $2.65 to $2.80 for 2022.
Click here to download our most recent Sure Analysis report on Leggett & Platt (preview of page 1 of 3 shown below):
Walgreens Boots Alliance (WBA)
- Dividend Yield: 4.7%
Walgreens Boots Alliance is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the company employs more than 325,000 people and has more than 13,000 stores.
Walgreens Boots Alliance is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the company employs more than 325,000 people and has more than 13,000 stores.
On June 30th, 2022, Walgreens reported Q3 results for the period ending May 31st, 2022. Sales from continuing operations dipped -4% and adjusted earnings-per-share decreased -30% over the prior year’s quarter, from $1.37 to $0.96, mostly due to peak COVID-19 vaccinations in the prior year’s period. Earnings-per-share exceeded analysts’ consensus by $0.03. The company has beaten analysts’ estimates for 8 consecutive quarters.
Walgreens reiterated its guidance for low-single digit growth of its annual earnings-per-share.
Click here to download our most recent Sure Analysis report on Walgreens (preview of page 1 of 3 shown below):
Final Thoughts
Retirees have had a challenge producing satisfactory income over the past decade, due to historically low interest rates which have brought down yields across fixed income and the stock market. Interest rates have spiked to begin 2022, and the 10-year U.S. Treasury now yields 3.15%.
But investors can still do better than this, by buying shares of quality dividend-paying stocks with yields above 4%. And, the best dividend stocks such as the Dividend Aristocrats, can grow their dividends each year. Importantly, dividend growth helps protect investors’ purchasing power against inflation, whereas most bonds do not offer inflation protection.
The four dividend stocks on this list can be the foundation of a quality income-producing portfolio, allowing retirees to live on their dividends.
Other Dividend Lists
The Dividend Aristocrats list is not the only way to quickly screen for stocks that regularly pay rising dividends:
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 44 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.