Buying and holding high-quality dividend stocks is a fantastic way for investors to beat the market over the long term. But dividend stocks can be even more ideal for retirees, whether they're searching for a way to juice their annual returns or to generate a predictable stream of extra income each quarter.
So we asked three top Motley Fool investors to each choose a dividend stock they believe is perfect for retirees. Read on to learn why they picked Verizon Communications (NYSE: VZ), Target (NYSE: TGT), and Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B).
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A high-yielding wireless giant
Steve Symington (Verizon Communications): Verizon Wireless has fallen around 15% in 2017, driven by a combination of falling wireline FiOS video subscribers as cord-cutting takes its toll and by steep competition that led to the telecom leader's first-ever decline in postpaid wireless subscribers earlier this year.
To be fair on the former, Verizon's total FiOS revenue climbed 4.8% last quarter to $2.9 billion, as 66,000 net new FiOS internet subscribers more than offset the impact of 18,000 fewer FiOS video connections. And regarding the latter, Verizon has done an admirable job of turning its wireless trends around through its successful introduction of Verizon Unlimited, adding 603,000 net new postpaid wireless subscribers last quarter.
All the while, Verizon has increased its dividend -- which currently yields 5.2% annually -- for 11 consecutive years, even as it invests heavily to maintain its industry leadership ahead of the impending rollout of next-gen 5G networks. In fact, last quarter the company also unveiled a target for driving $10 billion in cumulative cash savings through operational efficiency initiatives over the next four years, which should provide even more flexibility to bolster capital returns and infrastructure investments.
With Verizon stock trading at just 11.7 times trailing-12-month earnings as of this writing, I think now is a great time for retirees -- or any investor seeking steady dividends and modest growth -- to open or add to a position.
A beaten-down superstore
Leo Sun (Target): Shares of Target have fallen about 20% this year due to weak sales growth and fears about competition from e-tailers. Specifically, Amazon.com's (NASDAQ: AMZN) takeover of Whole Foods could hurt Target's grocery business, which generated over a fifth of its revenue last quarter.
However, I believe that those fears are overblown, and that Target's scale, its digital expansion, and focus on younger consumers than Wal-Mart (NYSE: WMT) could widen its moat. Target has been renovating its stores, increasing the number of small-format stores in denser neighborhoods, and adding features to its app, which lifted its digital sales by 32% annually last quarter.
It's also slashed prices on thousands of products to keep pace with Amazon and Wal-Mart, while the use of long-term lease contracts could prevent Amazon from using nearby Whole Foods stores to place pickup lockers or fulfill Prime Now orders.
As a result, analysts expect Target's revenue to rise 2% this year, but for its earnings -- weighed down by those price cuts -- to fall 10%. That decline is expected to decelerate with a milder 2% drop next year as it turns things around.
Target' trades at just 13 times next year's earnings, and it pays a forward dividend yield of 4.2%. That dividend, which has been raised annually for nearly half a century, is supported by a low payout ratio of 49%. Therefore, retirees who believe that Target will survive and evolve -- just as Wal-Mart did -- should take a closer look at this cheap income stock.
A rock-solid oil play
John Bromels (Royal Dutch Shell): Rising oil prices, combined with an incredible current dividend yield and solid fundamentals, make Royal Dutch Shell an excellent choice for retirees' portfolios. The company has been making all the right moves to ensure it's a stock that someone on a fixed income can buy and forget about.
Let's start off with the mouth-watering 5.7% current dividend yield, which is nearly best in class. Shell hasn't cut its dividend during the oil price slump like many of the smaller companies in its industry -- in fact, it hasn't cut it since World War II -- and it seems unlikely to do so moving forward. Shell has been able to cover its cash dividend for more than a year using cash from operations, so the dividend payout is secure.
True, Shell does offer investors the option of a scrip dividend -- receiving their dividends in shares instead of in cash -- but that's only an option, and for those who would just reinvest the dividends anyway, it's a perfectly reasonable one.
Shell turned in a solid second quarter even with oil prices largely below $50 a barrel, and its most recent third quarter -- during which Brent crude prices averaged about $52 a barrel -- was fantastic, with profits of $4.1 billion, up 47% year over year, and $10 billion in operating cash flow. It's also been expanding its liquefied natural gas business, a market it expects will grow even faster than oil in coming years.
I can't think of a stock more ideal for retirees looking for secure investments for their portfolio.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. John Bromels owns shares of Amazon and Verizon Communications. Leo Sun owns shares of Amazon and Verizon Communications. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Verizon Communications. The Motley Fool has a disclosure policy.