Dividend Power: 5 Retirement Favorites

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For investors thinking about retirement, it may be time to look at dividend stocks for income, explains Prakash Kolli, income investing specialist and editor of Dividend Power.

To obtain this list retirement ideas, we screened for stocks increasing their dividend for at least ten years combined with a 4%+ dividend yield. At this level dividends are important because they become a major component of total return.

In addition, we add criteria for dividend safety and require an earnings payout ratio of less than 65%. We don’t want to overpay for income, so we also need a price-to-earnings ratio (P/E ratio) of not more than 15X.

Western Union Company (WU) is the first income stock for retirees. The company was founded in 1851 as a telegraph company, but it added services with time. Today, the corporation is the world’s largest money movement and payment services business. Western Union operates globally with 550,000+ retail agents and a digital business. Total revenue was about $4,865 million in the past twelve months.

The company’s yield has been outstanding at approximately 6.0%. Few companies, besides real estate investment trusts (REITs) and master limited partnerships (MLPs), offer a dividend yield this high. Moreover, the dividend is well-covered, with a payout ratio of ~43%.

One risk is that competition is increasing for money transfer services; thus, the stock price has been down about 28% in the past year. However, Western Union is undervalued, recently seen trading at an earnings multiple of 8.7X, which is below the 10-year range and near the lower end of the five-year range. Therefore, investors should look strongly at this stock when combined with dividend safety.

Verizon Communications (VZ) is our second income stock for retirees. The company is a well-known telecom giant focusing on cellular and broadband services for consumers and businesses. The company has roughly 115 retail cellular customers, 7.3 million broadband connections, of which about 6.6 million are FiOS, and 28 million business connections. Total revenue was around $134,325 million in the last twelve months.

Verizon has been paying a ~5.9% dividend yield, the highest in a decade. Verizon only slowly raises the dividend at about a 2% CAGR, but the dividend safety has been strong, with a payout ratio of approximately 47%.

The stock has recently been ridiculously cheap because of recession fears, competition, and worries about subscriber growth. Verizon has been trading at a P/E ratio of about 8.4X, well below the five-year and 10-year ranges. I view Verizon as a convincing addition to income portfolios.

M.D.C. Holdings (MDC) is a homebuilding and financial services company founded in 1972. The company builds new homes under its Richmond American brand, mainly in Colorado, California, Arizona, Nevada, and Florida. In addition, the company has smaller operations in other states. Total revenue was $5,523 million in the past twelve months.

The homebuilder’s stock has recently been yielding 6.0%, the highest since the COVID-19 pandemic bear market. Furthermore, the dividend is snowballing at an approximately 17% compound rate in the trailing five years. Finally, the dividend is supported by a conservative payout ratio of only around 21%, lowering the possibility of a cut or omission.

M.D.C. Holdings’ stock price has been battered in 2022 and it has moved down nearly 39%. Investors fear rising mortgage rates and a recession will cause contraction in the housing market, impacting revenue and profitability.

That said, mortgage rates are off their peak, and the unemployment rate is near a record low. Moreover, recently at a forward P/E ratio of roughly 3.6X, the stock has been inexpensive and trading well below its five-year and 10-year P/E ranges, making it worthwhile.

The fourth income stock for retirees is Walgreens Boots Alliance (WBA). The company is one of two large pharmacy retail chains in the US. Walgreens Boots also has international operations. The total store count is more than 9,000 in the US and 4,000 internationally. Walgreens Boots also owns an e-commerce site. Total revenue was $134 billion in the last twelve months.

Walgreens Boots has been boasting dividend yield of about 5.2%, the highest since the market decline during the worst months of the COVID-19 pandemic. Despite the high yield, the earnings payout ratio is modest at approximately 36%, making the dividend relatively safe.

It has also allowed Walgreens Boots to increase the dividend at a 5.1% compound rate in the past five years. Furthermore, the company is a Dividend Aristocrat with 47 years of increases.

The pharmacy retailer has been undervalued, too, trading at a low valuation of 7.3X earnings. In addition, the company is facing more competition and an overhang from opioid lawsuits, resulting in a 30% decline in the stock price. That said, Walgreens Boots has been cheap, and trading below its five-year and 10-year valuation ranges. Investors should take a look here.

Fidelity National Financial (FNF) is the final income stock for retirees. The firm was founded in 1847 and sells insurance products, including title, escrow, trust, home warranty, life, and annuities. Total revenue was $14,495 million in the trailing twelve months.

Fidelity National has been paying a dividend yield of 4.4%, a little lower than the other stocks on this list. The value is again the highest since the pandemic bear market. However, the dividend has a payout ratio of about 20%, providing some confidence in its safety and leaving room for future growth. The company has grown the dividend at a roughly 12% compound rate in the past five years and decade.

The valuation is low, too, at a P/E ratio of ~6.3X, below the market average and less than the five-year and 10-year averages. The stock price has been down about 22% year-to-date because investors fear a housing downturn and that a recession will trigger, lowering demand for insurance products. However, the low valuation, high dividend yield, and dividend safety make Fidelity National a worthy stock to consider.

About the Author

Prakash Kolli is the founder and author of the Dividend Power investment blog. He writes about dividend growth stocks for the long-term small investor seeking to invest in dividend stocks for income and growth. His focus is on undervalued stocks with sustainable dividend growth and capital appreciation potential. His work has appeared on Seeking Alpha, Sure Dividend, ValueWalk, and other financial sites.

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