The 10 Best Dividend Stocks For Retirement

Retirement Dividend Stock: Johnson Controls

Johnson Controls (JCI) is a diversified manufacturing company with a $24 billion market cap.

The company manufactures:

  • Battery systems
  • Car interiors and components
  • Building control systems and power solutions

Johnson Controls has the following automotive market shares by region:

  • China – 44%
  • Europe – 38%
  • SE Asia, Japan, Korea – 13%
  • North & South America – 36%

While some manufacturers are struggling due to the global growth slowdown, Johnson Controls continues to post favorable results.

The company realized 11% adjusted earnings-per-share growth in its most recent quarter due to large share repurchases and margin gains.

Johnson Controls stock currently has a 3.1% dividend yield. The company’s stock is trading for dividend yield highs not seen since the Great Recession of 2007 to 2009.

JCI Dividend Yield History

Source: Sure Dividend

Johnson Controls has compounded its earnings-per-share at 7.7% a year over the last decade. The company is expecting 8% to 14% earnings-per-share growth in 2016. Over the long-run I expect EPS growth of between 7% and 9%, in line with historical averages. This growth combined with the company’s ~3% dividend yield gives investors expected returns of 10% to 12% a year.

Johnson Controls appears deeply undervalued at current prices. The company is trading for a price-to-earnings ratio (using adjusted earnings) of just 10.6.

Fortunately, there are 2 catalysts in place…

The first of which is Johnson Controls’ planned spin-off its automotive business in October of 2016. The spin-off will allow Johnson Control’s two primary business units to pursue independent strategies, which will benefit shareholders.

The second catalyst is Johnson Control’s planned merging with Tyco in a tax inversion. The deal is expected to be completed by the end of 2016 and will result in Tyco ‘relocating’ to Ireland to take advantage of favorable tax treatment. Tyco shareholders will own 56% of the combined company.

Johnson Controls had paid steady or increasing dividends for 38 consecutive years. The company’s stock offers investors an above-average yield, solid growth prospects, and consistent growth.

Retirement Dividend Stock: Cummins

Cummins (CMI) is the diesel engine industry leader. The company has the following market shares by category and region:

  • 78% market share in mid-duty (MD) diesel truck engines in North America
  • 34% in heavy-duty (HD) diesel truck engines in North America
  • 42% MD & HD market share in truck diesel engines in India
  • 17% MD & HD market share in truck diesel engines in China

Cummins has a strong competitive advantage in diesel engine manufacturing. The company is much larger than competitors Navistar (NAV) and Detroit Diesel (not publicly traded). Caterpillar (CAT) also manufactures diesel engines, but it is not the industry leader. Cummins competitive advantage in diesel engine manufacturing has led to 25 consecutive years of steady or rising dividend payments.

The company’s stock has fallen to ~$100 per share since highs of ~$150 per share reached in the Summer of 2014. The global growth slow down and strong United States dollar have impacted the company – but not to the same degree as the selloff in the stock. Cummins is expecting earnings-per-share to decline by 2% to 10% in fiscal 2016.

The company’s stock is currently trading for a price-to-earnings ratio of just 11.5. Cummins is currently trading for dividend yield highs not seen since the very worst of the Great Recession – even though the company is still very profitable (Cummins has generated $1.4 billion in earnings over the last 12 months).

CMI Dividend Yield History

Source: Sure Dividend

Low stock prices have caused Cummins dividend yield to rise to 3.7%. The company’s dividend is very safe. Cummins currently has a conservative payout ratio of 44.8%.

When the macroeconomic environment shifts, Cummins will very likely return to growth. The company has compounded earnings-per-share at 11.3% a year over the last decade. I expect Cummins to continue growing earnings-per-share at a double-digit clip over the long run as it repurchases shares, increases efficiency, and continues its organic growth.

Now is an excellent time to purchase this industry leader while it is still trading at a discount to fair value.

Final Thoughts

This article analyzed 10 great businesses that fit the 5 characteristics retirement investors should look for in dividend stocks

  1. High yield for income
  2. Trading at a fair or better price
  3. A strong competitive advantage for safety
  4. A long growth runway for reliable future growth
  5. A long record of dividend increases for consistency

All 10 of the best dividend stocks for retirement analyzed in this article are shown below, sorted by dividend yield:

  • Johnson Controls has a dividend yield of 3.1%
  • Archer-Daniels-Midland has a dividend yield of 3.2%
  • Flowers Foods has a dividend yield of 3.3%
  • Consolidated Edison has a dividend yield of 3.4%
  • SCANA has a dividend yield of 3.5%
  • Emerson Electric has a dividend yield of 3.7%
  • Cummins has a dividend yield of 3.7%
  • Verizon has a dividend yield of 4.3%
  • Southern Company has a dividend yield of 4.5%
  • AT&T has a dividend yield of 5.0%

You will notice that none of the companies above have ultra-high dividend yields of 8%, 9%, 10%, or more. Businesses with extremely high yields tend to either have serious risks associated with the business or tend to have negative growth prospects.

Retirement investors who reach for yield run the very real risk of seeing their income stream decline over time. Investing in businesses with favorable growth prospects and above average yields provides a balance of current income and rising income potential in the future.

Above all else, it is critical to take a long-term perspective when investing; even in retirement (perhaps especially in retirement).

“The single greatest edge an investor can have is a long-term orientation” – Seth Klarman, Billionaire manager of Baupost Group

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Disclosure: None.

The Dividend Aristocrats Index is an excellent place to start looking for such high ...

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