Financial & Estate Planning

By Bob Ciura, for Sure Dividend

Retirees face the difficult task of replacing lost income. While a retiree no longer receives a paycheck from employment, the everyday expenses of life continue well into retirement. And with the rising cost of healthcare in the U.S., retirees may even face an income shortfall, as their Social Security and/or pension may not be enough to maintain their pre-retirement standard of living.

This is why retirees should consider investing in dividend stocks. Many retirees may view the stock market as too risky, but high-quality dividend stocks such as the Dividend Aristocrats can provide high levels of reliable income for retirement. The following 3 Dividend Aristocrats pay high yields to shareholders, and have grown their dividends year over year.

Retirement Dividend Stock #1: AT&T (T)

AT&T is a highly attractive dividend stock, because it combines a high yield of over 6% with more than 30 consecutive years of dividend growth. AT&T is the largest communications company in the world. It offers multiple telecom services including mobile, broadband, and video service to more than 100 million U.S. consumers and more than 3 million businesses. It also owns WarnerMedia, and DirecTV. The company generates $170 billion in annual revenue.

On July 24th, 2019 AT&T reported second-quarter 2019 results. For the quarter the company generated $45.0 billion in revenue, up 15% from the year-ago quarter, primarily driven by the Time Warner acquisition (the deal closed June 14th, 2018). Declines in AT&T’s legacy wireline services and domestic and wireless video equipment were more than offset by the addition of WarnerMedia and improvement in the domestic wireless services.

AT&T’s future growth will be fueled by its new venture into media content. The $100 billion acquisition of Time Warner (including debt) instantly made AT&T a content giant. Time Warner adds the Warner Bros. movie studio, as well as HBO and multiple cable networks including TBS, TNT, and CNN.

This will provide AT&T a hedge against rising content costs, and a massive advertising platform. Growth will allow AT&T to continue raising its dividend, as it has done for 35 consecutive years, even during recessions.

Retirement Dividend Stock #2: AbbVie (ABBV)

AbbVie also has a high dividend yield above 6%. It is a pharmaceutical company that generates annual revenue of more than $30 billion. AbbVie is a Dividend Aristocrat, going back to its days as a subsidiary of Abbott Laboratories (ABT). Its most important product is Humira, which by itself represents ~60% of annual revenue.

In late April, AbbVie reported its 2019 first-quarter earnings results. Revenue of $7.8 billion increased 0.4% on an operational basis (excluding currency). AbbVie’s revenues were positively impacted by strong growth from other products such as Imbruvica, which grossed sales of $1.02 billion, up 34% from the same quarter last year. AbbVie’s adjusted earnings-per-share increased 14% for the quarter.

AbbVie’s major risk is loss of exclusivity for Humira, which has already transpired in Europe and will occur in the U.S. in 2023. Fortunately, AbbVie has multiple organic growth opportunities to replace any declines in Humira sales after 2023. AbbVie expects non-Humira product sales to exceed $16 billion by 2020, and $35 billion by 2025.

AbbVie is also investing aggressively in acquisitions, specifically the recent $63 billion takeover of Botox-maker Allergan. The acquisition diversifies AbbVie’s product offerings by adding exposure to new segments while enhancing its position in existing categories. The combined company will have annual revenues of nearly $50 billion, based on 2018 results.

AbbVie operates with strong safety metrics. It has an expected dividend payout ratio of 49% for 2019, which indicates a secure dividend. This means AbbVie’s 6.3% dividend is secure, with room for future increases.

Retirement Dividend Stock #3: Caterpillar (CAT)

Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It is a global leader in the manufacture of heavy machinery, with a market capitalization of $78 billion.

The company operates in three primary segments: Construction Industries, Resource Industries and Energy & Transportation, along with ancillary financing and related services through its Financial Products segment.

On July 24th, 2019 Caterpillar reported strong second-quarter 2019 results. For the quarter the company reported revenue of $14.4 billion, representing a 3% increase compared to the prior year’s quarter. This was driven by an 11% increase in Resource Industries and a 5% improvement in Construction Industries.

Caterpillar is benefiting from the steady growth of the global economy, in particular the U.S. economy and its strong housing and construction markets. It also has durable competitive advantages, in that it is one of the largest companies in the markets it addresses, with a brand that is well-known and recognized around the globe. This is why Caterpillar continued to increase its dividend during the financial crisis of 2007-2009, despite the fact that it operates in a highly cyclical industry.

Caterpillar has an attractive dividend yield of 3.1%, and the company has raised its dividend at a high rate in the past several years, including a recent 20% dividend increase. If the stock raises its dividend by 10% per year going forward, its dividend will double in just over seven years.

Final Thoughts

With interest rates on the decline and rising costs of food and health care, it is imperative for retirees to make sure their income keeps up with inflation. Most savings accounts and bank certificates of deposit offer very low interest rates, and no income growth potential. As a result, retirees should consider allocating a portion of their retirement savings to dividend stocks.

High-quality dividend stocks such as AT&T, AbbVie, and Caterpillar all provide much higher yields than the typical savings account or CD. In addition, they grow dividends each year, at a rate near or above inflation. This means retirees will not only receive high rates of income today, but they will also enjoy rising streams of income over time. Retirees can help replace lost income with these dividend stocks, and enjoy a more comfortable retirement.

Bob Ciura is senior VP at Sure Dividend, which aims to help investors build wealth over time by investing in high-quality dividend growth stocks.