Whether you’re in retirement, approaching retirement, or diligently planning ahead for retirement, dividend investing can provide you with predictable income as well as long-term growth potential. After all, retirees must ensure that they can generate enough cash flow to live comfortably without employment income. But not all dividend stocks should make it into your portfolio.
Deciding which dividend stocks are the best choices can be daunting. So if you’re feeling uncertain about where to begin looking for stocks that will create reliable long-term dividend income, you’re definitely not alone.
With that in mind, we’ve prepared some items to consider when you’re deciding which are the best long-term dividend stocks for your particular portfolio. We’ll also walk through some stocks that are especially popular with dividend investors.
What Would Warren Do?
Perhaps the most respected investor on the planet, Warren Buffett loves dividend stocks. That’s why two-thirds of stocks in his uber-successful Berkshire Hathaway portfolio pay dividends.
How does he pick them?
Well, I can’t promise that answer here. But I can tell you that the portfolio has reliable dividend stocks that pay consistently increasing dividends.
The “Oracle of Omaha” — as Buffett has been nicknamed — likes businesses that aren’t overly capital intensive. In other words, he looks for businesses that have a track record of using low-cost capital to drive profitability. And he likes well-established businesses with a formidable competitive advantage that operate in “forever” industries, which are those that people will always need like food, banks, and “sin” industries like tobacco, gambling, and alcohol.
When these stocks generate increasing and consistent cash flow, the portfolio can deploy the funds in order to make more money for its investors and for itself. Whether the best option happens to be providing capital for an acquisition or buying more shares to feed into the portfolio, dividend income allows it all to happen.
You can apply this same mentality to your search for the best long-term dividend stocks.
Where to Find the Best Long-Term Dividend Stocks
When you’re looking for long-term dividend stocks, there are different areas and types of investments to consider. Here are some tips for your search.
Use Benchmarks Like Dividend Aristocrats
When it comes to obtaining ideas for income investing, the Dividend Aristocrats are always a good place to begin. The Dividend Aristocrats Index is maintained by S&P Indices and has done a lot of the vetting for you.
To qualify for this distinguished list of dividend stocks, a company must have dividend increases for at least 25 consecutive years. This means that Dividend Aristocrats are effectively giving their investors “pay raises” in the good times and the bad.
As of April 2021, the following dividend-paying companies have been able to maintain their dividend payout during the dot-com stock market crash in the 2000s, the financial crisis of 2008, and through the first year of the COVID-19 pandemic. Not too shabby.
Coca-Cola (NYSE:KO) easily meets the Dividend Aristocrats’ criteria for consecutive years of dividend payouts with 58. That kind of payout reliability enables retirees to feel confident in this long-term dividend stock.
Backing up the reliable dividends is the company’s more than 20 billion-dollar brands, its expansive distribution network, and its commitment to emerging markets like energy drinks, coffee, water, juices, and dairy beverages.
As of April 2021, Coca-Cola’s dividend yield was 3.18%.
Johnson & Johnson
With a portfolio of formidable brands that produce health care items consumers regularly need, plus vital medical devices and pharmaceuticals, the diversity of Johnson & Johnson’s offerings are significant. The company’s competitive advantage, innovation, is one of the markers of a reliable long-term dividend stock.
As of April 2021, Johnson & Johnson’s dividend yield was 2.47%.
While 49 years is not quite 58, it’s impressive all the same. And that’s how long Kimberly-Clark (NYSE:KMB) has been increasing its dividends.
This Dividend Aristocrat is a multinational personal care goods manufacturer. Operating profits have grown despite declines in revenue in recent years.
The company is another Dividend Aristocrat with a steadfast commitment to innovation and marketing.
As of April 2021, Kimberly-Clark’s dividend yield was 3.3%.
Look to Real Estate Investment Trusts
Real estate investment trusts (REITs) have always been a favorite of dividend investors.
Why? Because to qualify as a REIT, the real estate company must pay out 90% of its taxable income — at a minimum. So typically, REITs pay above-average dividends.
While a high dividend yield is attractive, a high dividend yield that’s sustainable is even more attractive. And if the company you’re considering investing in has long-term room to grow too, you may have found yourself a trifecta.
The dividend yield is easy to measure. Determining sustainability and long-term room to grow is more subjective. Focus on finding a REIT with a solid business model that is operating in a growth industry.
Then, analyze the REIT’s income stream to see if it’s sustainable. One metric that can indicate sustainability is a REIT’s credit rating. The higher the rating, the less the REIT has to pay in order to access debt capital, which improves the REIT’s growth opportunity.
Consider Current Events
Keeping an eye on current events can help you choose the best long-term dividend stocks. Companies might make statements, or you might notice an interesting piece of news that provides insight about possible future performance.
For example, one of the country’s oldest power sources is natural gas. Now, largely because of fracking and advances in horizontal drilling technologies, natural gas is used in almost half of all homes.
Natural gas is abundant, and it’s not expensive. But as the global population continues to grow and energy infrastructure costs climb, there is an opportunity for long-term value creation in the form of dividend payouts.
In 2020, as the COVID-19 pandemic took over the world, the industry took a hit. But in early 2021, rising oil prices made energy stocks attractive again. Amid such uncertainty, current events can indicate which companies may do well regardless of short-term commodity price volatility.
For example, Dividend Aristocrat Chevron (NYSE:CVX) had a challenging 2020 and reported a loss of $5.5 billion for the year. But reduced costs and a strong balance sheet position Chevron nicely, even during price volatility. Chevron reports that its top priority is sustaining and growing its dividend.
Watching the industry in this way, as well as noting the remarks made by the company, are current events that can help you select the best long-term dividend stocks for your portfolio.
Think About Individual Stocks, Mutual Funds, or ETFs
For investors seeking dividend growth and hoping to live off of dividend income in retirement, dividend growth stocks can be a good choice.
Dividend growth stocks might not pay the highest dividend yields, but their track record of consistently raising dividends year over year is attractive in terms of reliability. I bet a predictable raise every year sounds good to many people right about now.
Choosing an individual stock might not be the answer for every investor. For some, a mutual fund or ETF can make more sense.
There are a number of successful mutual funds and ETFs available that target long-term dividend companies. You can find more flexibility and diversification using this option.
Depending on what exactly you’re looking for, different options are available. So whether you want to seek more growth potential with newer companies, stability with established companies that have increased dividend payments for a certain period of time, or a combination of the two, funds might be the answer.
Planning for the Long Term
In a letter to his shareholders, Warren Buffett said, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
Dividend stocks are long-term investments. If you follow the advice in this article, you’ll be thinking like Buffett and finding the best long-term dividend stocks for your retirement in no time.
But you’re not on your own in the dividend hunt. If you’re looking for more guidance on where to find the best dividend stocks, Investors Alley can help. Subscribe to Investors Alley “Dividend Hunter” newsletter today to learn which stocks you can buy and hold forever. They may just be the backbone of your retirement.