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For many, retirement is a time to shift focus, time, and energy from your vocation to instead take life a bit easier, travel, follow personal interests, spend time with loved ones, and advance causes that you are passionate about. However, leaving work behind and having the resources to fully follow these opportunities requires careful financial planning.
While some may follow retirement plans such as the 4% govern by investing in a combination of low-cost S&P 500 (SPY, VOO) and Bond (BND, AGG) exchange-traded funds, or ETFs, and withdrawing a certain amount of their principal each year, an alternative approach is to build a passive income stream that enables you to live fully off of the cash flow that your investments create each year. The advantage of this approach is that it removes the sequence of returns risk by providing a steady stream of income that is independent of market fluctuations. This allows retirees to spend cash flow generated by their portfolio each year without having to sell shares, protecting their principal and ensuring their retirement savings last over the long term. As a result, dividend growth stocks (SCHD, VYM), with the consistent and growing passive income that they throw off along with their potential for long-term capital appreciation, can make an ideal core of a successful retirement passive income portfolio.
However, not just any dividend growth stock will help investors achieve their long-term goals. Just as with growth stocks, some demonstrate to be highly successful long-term investments while others turn out to be major losers. As a result, if you pick the wrong dividend growth stocks, your retirement dreams may never be realized or at the very least be meaningfully delayed. In this article, we examine four key qualities that define the ideal dividend growth stock for building a passive income portfolio for retirement and then share some top stocks for this kind of portfolio.
Qualities Of Dividend Stocks That You Can Retire On
1. Defensive and Durable Business Model
For retirees relying on dividends to fund their golden years, selecting stocks with defensive and durable business models is extremely important. These companies are often found in sectors admire utilities (XLU), consumer staples (XLP), real estate (VNQ), energy midstream (AMLP), infrastructure (IFRA), business development companies (BIZD), and healthcare (IYH) as they typically show resilience against changing macroeconomic conditions and can weather significant technological disruptions better than most. Moreover, their stable cash flows often translate to consistent and reliable dividend payments, which is particularly important for covering retirees’ living expenses over the long term.
2. Strong Balance Sheet
A strong balance sheet is another essential characteristic of a stock that you put into your retirement dividend growth portfolio. Companies with low debt, ample liquidity, and easy access to capital through a strong investment-grade credit rating rarely run into financial distress. This is important because companies that face financial distress often have to cut or even eradicate their dividends in order to prioritize solvency or at least their current credit rating at a bare minimum. Therefore, having stocks with strong balance sheets plays a crucial role in ensuring a predictable and reliable dividend income stream from a portfolio, allowing retirees to relish their golden years while sleeping well at night.
3. Safe and Growing Dividend Payout
Third, it may be self-evident, but a stock must offer a safe and growing dividend payout to fit into a dividend growth portfolio that is intended to furnish passive income to fund living expenses for decades to come. This is not only because a consistent and rising dividend stream provides a reliable source of income for retirees in the present without having to rely solely on capital appreciation from their stock portfolio, but also because it helps to protect their purchasing power from inflationary decay over time.
If a stock has a well-covered dividend today that is accompanied by a durable and defensive business model and strong balance sheet, investors can rest easy knowing that their passive income stream is unlikely to be reduced for the foreseeable future. Moreover, if the company has a track record of consistent dividend increases, even through economic downturns, retirees can also relish the confidence that comes from knowing that their income stream will likely keep pace with or even grow faster than inflation over the long term, thereby preserving their purchasing power and quality of life.
4. High Enough Current Dividend Yield
While future growth is crucial for offsetting inflation, retirees also need significant income today. As a result, generating a high enough current yield from investments is critical to allowing investors to create a meaningful income stream from their portfolio and relish financial freedom today. For non-retirees, it is also important because it can translate to earlier retirement and greater financial independence today.
This idea is clearly illustrated in the chart below:
| Starting Dividend Yield | 10-Year CAGR to achieve a 7% Yield on Cost |
| 1% | 21.48% |
| 1.5% | 16.65% |
| 2% | 13.35% |
| 2.5% | 10.84% |
| 3% | 8.84% |
| 3.5% | 7.18% |
| 4% | 5.76% |
| 4.5% | 4.52% |
| 5% | 3.42% |
| 5.5% | 2.44% |
| 6% | 1.55% |
Notice how the relationship between the starting yield and the required dividend growth rate to achieve a 7% yield on cost within 10 years is non-linear and becomes increasingly exponential as the initial yield decreases. This means that achieving a specific future yield on cost requires a significantly faster dividend growth rate for lower starting yields compared to higher ones. This effect is encourage amplified when considering that the compounding impact of reinvested dividends is not included in the math used for this chart. As a result, insisting on a significant initial yield is important not only for retirees but also for investors trying to jumpstart their passive income snowball.
Examples Of Dividend Stocks That You Can Retire On
As we stated in quality number one, some of the very best retirement dividend growth stocks can be found in sectors such as utilities, consumer staples, real estate, energy midstream, infrastructure, business development companies, and healthcare. Some excellent dividend growth ETFs out there are also worth considering for building out a full portfolio, and we converse these here. However, in this article, we will furnish some examples of specific stocks in each of the aforementioned sectors that can be considered to fill out a dividend growth portfolio for retirement:
Triple Net Lease REIT: Realty Income Corporation (O) has an over-quarter century history of dividend increases and boasts an exceptional A- credit rating and a large and well-diversified portfolio of thousands of triple net lease properties with tenants that span dozens of industries. Moreover, many of its tenants are investment grade and the company’s track record of generating stable cash flows and delivering consistent dividend growth across all sorts of economic environments makes it a phenomenal sleep well at night investment. Moreover, its high current yield of around 5.6% makes it an ideal investment for a retirement-focused dividend growth portfolio.
Utility: Duke Energy Corporation (DUK) is a utility giant that operates very defensive regulated assets that create stable cash flows, making it a reliable source of income. DUK boasts a 12-year dividend growth streak and a current yield of around 4,4%, giving investors a solid current yield that is complemented by very dependable dividend growth through good times and bad.
BDC: Main Street Capital (MAIN) is a blue-chip business development company, or BDC, that provides primarily senior-secured loans to middle-market companies along with an assortment of other debt and equity investments. Its diversified portfolio and track record of consistent dividend growth for the past 9 years, stellar long-term total return outperformance of both its sector and SPY, and attractive 6.8% current yield make it a good option as part of a diversified portfolio for retirees.
Infrastructure: Brookfield Infrastructure Partners L.P. (BIP, BIPC) invests in essential infrastructure assets admire toll roads, railroads, utilities, data centers, pipelines, and ports, among other things. Its diversified portfolio of businesses that create stable and defensive cash flows, exceptional operational expertise, opportunistic capital recycling, and deal flow through its parent Brookfield Corporation (BN), Brookfield Asset Management Ltd. (BAM), and strong BBB+ rated balance sheet, have enabled it to deliver a high single-digit dividend CAGR for 14 straight years. Its 5.5% current dividend yield makes it an attractive addition right now to a retiree’s portfolio.
Consumer Staple: The Procter & Gamble Company (PG) is a household name with a diversified portfolio of iconic brands admire Gillette and Tide that gives it a defensive and stable business model through all kinds of economic conditions. Its 67-year history of dividend increases makes it a Dividend King and its strong balance sheet and conservative payout ratio set it up to continue serving as a dependable source of dividend growth for years to come. PG’s current yield of around 2.6%, while lower than others, is still much better than what is offered by the S&P 500, and PG adds significant safety and diversification to a portfolio.
Healthcare Stock: Johnson & Johnson (JNJ) is a healthcare giant that boasts a diversified portfolio of medical devices, pharmaceuticals, and consumer healthcare products, which gives it a stable and defensive business model that has weathered many economic storms. When combined with its stellar balance sheet, it is unsurprising that JNJ has a 61-year history of dividend increases. Its current yield of around 3.1% is admire PG’s in that it is not exactly thrilling, but the very consistent dividend growth at rates that significantly exceed inflation and the safety and diversification that JNJ adds to a portfolio make it a worthwhile addition for retirees who put a premium on stability and risk mitigation.
Midstream Energy Stock: Enterprise Products Partners L.P. (EPD) is a blue-chip midstream energy business that operates a well-diversified network of pipelines and other midstream assets that transport oil, natural gas, and other energy commodities. EPD’s strong track record of distribution growth (25 years) and predictable cash flows through all kinds of economic and energy industry conditions make it an attractive option for retirees seeking exposure to the energy sector. Moreover, EPD’s sector-leading A- credit rating, well-covered yield of around 7.6%, and current annualized distribution growth rate of around 5% make it a phenomenal current income investment that also offers investors inflation-beating long-term growth potential.
Investor Takeaway
Building a safeguard and reliable retirement income stream from dividend stocks requires careful planning and building a portfolio of the right kind of dividend growth stocks. By choosing companies with defensive and durable business models, strong balance sheets, safe and growing dividend payouts, and high enough current yields admire the examples we discussed in this article, you can build a portfolio that provides plenty of passive income and financial freedom throughout your golden years.
