You want to enjoy life in retirement, not fret that income stocks in your investment portfolio might be cutting or eliminating dividends. That's why, as a retiree, its generally wise to invest in companies with the financial strength to maintain dividends even amid a recession or, worse, the coronavirus pandemic.
These three dividend stocks fit that description well. Each provides a resilient business during tough times, and all three maintain strong financials. As a result, each is capable of delivering a high level of financial security, a strong return on investment, and peace of mind for retirees and their retirement nest egg.
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1. Target: 2.23% dividend yield
Target (TGT -0.65%) is among the more dependable stocks for a retirement portfolio. In June, deep in the midst of the pandemic, the company announced a dividend increase, its 49th consecutive year of dividend increases. That qualifies the company as a Dividend Aristocrat because it has raised its yearly dividend for at least 25 consecutive years. If it manages to raise it again next year, Target will gain the very rare distinction of being a Dividend King (a company with at least 50 consecutive years of dividend increases).
Target successfully adapted to the shift in consumer behavior toward online shopping, which only accelerated due to pandemic-induced shelter-at-home orders. In its first quarter, ended May 2, the company reported a whopping 141% increase in comparable digital sales over last year. But Target had success before the pandemic as well. The end of 2019 marked six consecutive years of more than 25% digital sales growth.
The company's first-quarter results also illustrate its resiliency. As a provider of consumer staples, Target fared better than many retailers during the current economic slowdown. It delivered an 11.3% year-over-year revenue increase. Its strength during a pandemic only adds to the company's successful pre-pandemic performance. Last year, Target experienced 3.7% year-over-year revenue growth.
Target's long history of dividends, resiliency during tough economic times, and its ability to adapt all combine to make it a solid, dependable retirement stock. And its payout ratio of 50% means it can comfortably continue to support the dividend going forward.
2. Illinois Tool Works: 2.55% dividend yield
Illinois Tool Works (ITW -0.86%), better known as ITW, is a global manufacturer of products and equipment for the restaurant, automotive, and construction industries (among others). Refrigeration equipment, welding tools, fasteners, medical device components, and adhesives are just some of the products it produces and sells.
Founded in 1912, the company has paid out regular dividends for over 50 years. And this past decade, the company has ramped up its payouts significantly. Its annualized dividend amount has grown from $1.52 per share in 2012 to the current $4.28 a share. ITW's long track record of consistent dividend increases provides just one example of its dependability as an income stock.
But a long history doesn't mean the dividend can't be slashed during tough times. That's where ITW shines. Even with a lofty $4.28 per share annual payout, ITW's payout ratio is a sustainable 55.6% of free cash flow. Despite the pandemic's global impact causing first-quarter revenue to decline by $324 million year over year to $3.2 billion, the company's free cash flow grew by $15 million year over year to $554 million. That suggests the company can take needed action to manage expenses during a downturn.
ITW also possesses a solid balance sheet. Its total assets of $14.1 billion at the end of Q1 outstripped its $11.9 billion in total liabilities. The company had $1.4 billion in cash and equivalents with only $4 million in short-term debt, ensuring that ITW can weather the pandemic and safely maintain its dividend.
3. Procter & Gamble: 2.54% dividend yield
Few companies have the dividend track record of Procter & Gamble (PG -0.37%). It's paid dividends for 130 years with 64 consecutive years of increases. The latest increase came in April, and while many companies pulled guidance citing the economic uncertainty injected by the pandemic, P&G expects its fiscal year 2020 revenue to grow in the 3% to 4% range year over year.
P&G's combination of consumer staples such as Pampers diapers and iconic brands like Crest toothpaste allowed the company to experience revenue growth despite the pandemic. Its revenue for the third quarter, ended March 31, increased 5% over the prior year.
The company exited the quarter with $15.4 billion in cash and equivalents, a substantial increase from last year's $2.7 billion. This puts P&G in a strong position to weather the current economic downturn while continuing to fund its dividend. This is one stock adding stability and a reliable income stream to your retirement portfolio.
