Combating Inflation For Retirement: 9 High-Dividend Stocks For The Long Term

by: Ong Kang Wei

Still being quite young and with a long investment horizon, I have been thinking about how I can combat inflation as I grow older and eventually retire. There are many ways to do this, but my favorite so far is buying dividend stocks.

My Strategy

This strategy may not be suitable for everyone as it covers a time frame of 45 years. Using this savings calculator, if I invest an initial amount of $30,000 into some dividend stocks, and add $400 monthly over 45 years, and grow the money by 7.3% yearly (The Dow Jones Industrial Average (NYSEARCA:DIA) had appreciated by 6.2% yearly from 1960-2010. Assuming that it appreciates the same way over the next 45 years, and that dividends of the portfolio will be sustained at around 3%, returns averaging 7.3% should be achievable. Furthermore, as seen here, most dividend aristocrats are able to beat both the market and inflation hands down.), I will get $2,466,399 (product here) in today's dollars, which would equate to around $370,000 worth of buying power 45 years later (calculated using, assuming that rate of inflation over the next 45 years will be equivalent or close to the rate of inflation over the past 45 years), and should be enough for a good, modest retirement, along with other savings along the way.

But of course, the numbers above differ for everyone depending on their age, financial condition, their investment horizon and some other attributes. You can create your own (similar) dividend strategy through the calculator I tagged above.

Portfolio Management

I plan to check the news for the stocks in my portfolio every weekend (any day), and read articles on great sites like Seeking Alpha, Yahoo! Finance, MSN Money or The Motley Fool. Besides this, when stocks are more overvalued (most stocks are still fairly priced at the moment), I plan to get loaded up on cash (I will add $400 monthly) and just collect my dividends. I will then wait for stocks to be more undervalued (e.g. recession, correction) before buying more stock, and will only sell when the dividend stocks decrease their dividend or announce news unfavorable to investors.

Although strategies and portfolio management are both very important, the stocks that will make up the portfolio are as important too. Therefore, here is the criteria that will pick out the stocks:

The Criteria

1. Quality

  • > 25 years of Consecutive Dividend Increases

This criteria screens out most of the stocks in the whole universe of stocks and is one of the most important criteria, in my opinion. With a market full of uncertainty, stocks that have increased their dividends consistently are rare, and are much more secure than holding other stocks. It is not really easy to get onto this list of stocks given that a company needs to have consistently growing profits and a strong business, which is able withstand recessions or downturns in the economy.

2. Dividend Picks

  • Dividend Yield > 3%

We want to get returns that are as good as possible, therefore a company with a high dividend would work better in producing higher returns over the long run in an investor's portfolio. Even so, one should not chase dividends and go for risky trades with sky-high dividends, but instead, go for dividend stocks that are consistently profitable and will benefit one's portfolio over the long term.

3. Sustainable Yields

  • EPS Growth Past 5 Years > 3%
  • Payout Ratio < 60%

A yield does not just have to be high, it also has to be sustainable. The criteria that a company's EPS should have gone up at least 3% year-over-year for the past 5 years was set to confirm that a company's business is still strong and not starting to decline. 3% may seem like too low a number for some, but one has to keep in mind that these companies have a long history and most likely have matured businesses.

The next criteria (payout ratio < 60%) was included in the screen to further confirm that a company's dividends are sustainable. The definition of payout ratio is the net income given out as dividends. A company with too high a payout ratio indicates that it may not be able to support the dividend in the future, especially during recessions or downturns, which are inevitable. Many companies will have to depend on their cash reserves to further expand in those times.

All these measures were actually taken to ensure that a company's dividend is and will be sustainable, as firstly, an announcement of a decrease in dividend would most likely impact the price of the stock, in both the near-term and the long-term, mainly because investors' confidence will have been lost. Secondly, a stock with declining dividends after it has been increased yearly for 25 years or more would not be attractive to me anymore, as it would be evident that there are problems with the company or its business model.

4. Other Criteria

  • P/E < 20

A stock with a P/E ratio of above 20 is considered to be overvalued by me and will not be considered as a buy. However good a dividend stock's fundamentals are, they are not resilient to plunges in stock prices and will plunge occasionally like other stocks do. An overvalued stock priced for perfection may plunge just because of a small miss in earnings or other short-term disappointments.

Without further ado, here are the products for this screen:

Company Sector Dividend Yield Payout Ratio EPS Growth Past 5 Years P/E Ratio Consecutive Dividend Increases (Yrs)
Abbott Laboratories (NYSE:ABT) Healthcare 3.13% 48.45% 21.98% 15.83 40
Automatic Data Processing, Inc.(NASDAQ:ADP) Technology 3.09% 55.39% 9.01% 19.96 38
The Clorox Co. (NYSE:CLX) Consumer Goods 3.40% 58.99% 4.96% 18.15 35
Chevron Co. (NYSE:CVX) Basic Materials 3.40% 27.98% 11.50% 8.68 25
Genuine Parts Company (NYSE:GPC) Consumer Goods 3.08% 48.30% 5.40% 16.18 56
McDonald's Co. (NYSE:MCD) Services 3.56% 52.17% 18.13% 16.29 36
Pepsico, Inc. (NYSE:PEP) Consumer Goods 3.06% 55.46% 3.82% 18.75 40
Sysco Co. (NYSE:SYY) Consumer Goods 3.56% 57.21% 3.57% 16.76 42
Walgreen Co. (WAG) Services 3.26% 39.65% 3.57% 13.95 37

All the stocks in this list are members of the S&P 500

1. Abbott Laboratories

Note: Abbott will be splitting into two companies on January 1, 2013, the new company is called AbbVie (ABBV, non-existent until 1/1/2013), which will contain Abbott's current pharmaceutical business. Find out more here.


  1. Outperformed S&P 500 YTD: (S&P 12.5% vs ABT 19.52%)
  2. Reasonable Valuation: (12-mth trailing P/E: 15.83, 12-mth forward P/E: 12.40)
  3. Steadily Increasing EPS: $1.62 (2002), $3.02 (2011)


  1. Diluting Shares: 1.56B (2003), 1.58B (2012)
  2. Increasing Long-Term Debt: 4.27B (2002), 12.04B (2011)
  3. Insiders own a negligible 0.17% of float

Abbott Laboratories engages in the discovery, development, manufacture, and sale of healthcare products worldwide. Abbott Laboratories was founded in 1888 and its headquarters is in Abbott Park, Illinois.

Target Short Term Entry Price(s):

  1. On 200-day moving average, support in Mid-November 2012, and/or
  2. $60.50-$61.50, support in June 2012

Desired Entry Price: $60

2. Automatic Data Processing


  1. Steadily Increasing EPS: $1.68 (2003), $2.82 (2012)
  2. Buying Back Shares: 594.8M shares outstanding (2003), 484.2M shares outstanding (2012)
  3. Decreasing Long-Term Debt (almost negligible): 84.67M (2003), 16.8M (2012)
  4. High ROE: 22.55%


  1. Insiders own a negligible 0.17% of float
  2. Underperformed S&P 500 YTD (6.49% vs S&P 12.5%)
  3. Slightly Overvalued: (12-mth trailing P/E: 19.96)

Automatic Data Processing, Inc. provides business outsourcing solutions. The company operates in three segments: Employer Services, Professional Employer Organization Services, and Dealer Services. The company was founded in 1949 and its headquarters is in Roseland, New Jersey.

Target Short Term Entry Price(s):

  1. $54-$55, and/or
  2. $52-$53, support in June 2012

Desired Entry Price: $50

3. The Clorox Co.


  1. Steadily Increasing EPS: $2.09 (2003), $4.10 (2012)
  2. Buying Back Shares: 213.68M (2003), 129.56M (2012)
  3. Outperformed S&P 500: (S&P 12.5% vs. CLX 17.17%)


  1. Negative Book Value per Share (BVPS): (-$0.15)
  2. Increasing Long-Term Debt: 495.0M (2003), 1.57B (2012)
  3. More Liabilities Than Debt: 4.767B Liabilities, 4.747B Assets

The Clorox Company manufactures and markets consumer and professional products worldwide. The company operates in 2 segments: the cleaning segment and the lifestyle segment. The Clorox Company was founded in 1913 and its headquarters is in Oakland, California.

Target Short Term Entry Price(s):

  1. $72.50, trend line shown here, and/or
  2. $71, low in Late October 2012

Desired Entry Price: $66, $69

4. Chevron Co.


  1. Attractive Valuation: (12-mth trailing P/E: 8.68, P/B: 1.56)
  2. Low Debt/Equity Ratio: 0.09
  3. High ROE: 18.96%
  4. Buying Back Shares: 2.14B (2002), 1.98B (2011)


  1. Problems in Latin America, especially Ecuador. (Lawsuits, Frozen Assets in Argentina, etc.)
  2. Days' Inventory: 13.50 (2003), 19.50 (NYSE:NOW)
  3. Low Insider Ownership: 0.01%

Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. Chevron Corporation was founded in 1879 and its headquarters is in San Ramon, California.

Target Short Term Entry Price(s):

  1. $100.50-$101, low in mid-November 2012, and/or
  2. $96-$97, low in late June 2012
  3. $94.50-$95, low in early June 2012

Desired Entry Price: $95

5. Genuine Parts Company


  1. Paid Dividends since 1948 and increased dividends yearly since 1957.
  2. Buying Back Shares: 174.38M shares outstanding (2002), 155.65M shares outstanding (2011)
  3. High ROE: 20.98%
  4. Decreasing Long-Term Debt: 674.8M (2002), 500.00M (2011)


  1. Low Insider Ownership: 0.32%
  2. Auto Company, therefore it is a cyclical stock. Cyclical stocks have the tendency of dropping more during recessions
  3. Underperformed S&P 500 YTD: (S&P 12.50% vs. GPC 7.80%)

Genuine Parts Company distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials. Genuine Parts Company was founded in 1928 and its headquarters is in Atlanta, Georgia.

Target Short Term Entry Price(s):

  1. $60-$60.50, trend line as seen here
  2. $56, low in late June 2012

Desired Entry Price: $56

6. McDonald's Corp.


  1. Steadily Increasing EPS: $0.77 (2002), $5.27 (2011)
  2. Increasing ROE: 8.7% (2002), 38.4%
  3. Buying Back Shares: 1.27B (2002), 1.02B


  1. Rising Wheat/Meats/Coffee Prices could threaten profit margins
  2. Debt/Equity Ratio: 0.97 (High)

McDonald's Corporation franchises and operates McDonald's restaurants in the global restaurant industry. Its restaurants offer various food items, soft drinks, coffee, and other beverages. McDonald's Corporation was founded in 1940 and its headquarters is in Oak Brook, Illinois.

Target Short Term Entry Price(s):

  1. $83.20-$83.70, low in November 2012, and/or
  2. $81-$82, support in Sept-Oct 2011

Desired Entry Price: $80, $81

7. Pepsico, Inc.


  1. Steadily Increasing EPS: $1.67 (2002), $4.03 (2011)
  2. Buying Back Shares: 1.72B (2002), 1.56B (2011)
  3. High ROE: 26.19%


  1. Rapidly Increasing Long-Term Debt: 2.19B (2002), 20.57B (2011)
  2. Slightly Overvalued: (12-mth trailing P/E: 18.75, P/B: 5.09)

PepsiCo, Inc. engages in the manufacture and sale of snacks, carbonated and non-carbonated beverages, dairy products, and other foods worldwide. The company was founded in 1898 and its headquarters is in Purchase, New York.

Target Short Term Entry Price(s):

  1. 200-day SMA, strong support in November 2012, and/or
  2. $67.50-$68, strong support in June, July and November 2012

Desired Entry Price: $64, $65

8. Sysco Corp.


  1. High ROE: 23.16%
  2. Steadily Increasing EPS: $1.18 (2003), $1.90 (2012)
  3. Buying Back Shares: 643.66M (2003)


  1. Slightly High Debt/Equity Ratio: 0.62
  2. Increasing Long-Term Debt: 1.25B (2003), 2.76 (2012)

Sysco Corporation, through its subsidiaries, engages in the marketing and distribution of a range of food and other food related products. Sysco Corporation was founded in 1969 and its headquarters is in Houston, Texas.

Target Short Term Entry Price(s):

  1. $30-$30.50, seen here, and/or
  2. 200-day SMA, support in July and August 2012

Desired Entry Price: $27- $28

9. Walgreen Co.


  1. Steadily Growing EPS: $1.13 (2003), $2.42 (2012)
  2. Attractive Valuation: (12-mth trailing P/E: 13.95, 12-mth forward P/E: 9.25, P/B: 1.75)
  3. Increasing Book Value per Share: $7.02 (2003), $19.36 (2012)


  1. Rapidly Increasing Debt: 9.40M (2003), 4.07B (2012)
  2. Rapidly Diluting Shares over past year: 889.29M (2011), 944.06M (2012)

Walgreen Co., together with its subsidiaries, operates a network of drugstores in the United States. The company was founded in 1901 and is based in Deerfield, Illinois.

Target Short Term Entry Price(s):

  1. $31.80-$32, low in November 2012
  2. $28-$29, low in June-July 2012

Desired Entry Price: $28

More Dividend Stocks

There are still many more great dividend stocks that are worth a buy in the long-term dividend investor's portfolio, and they are definitely not limited to the nine great dividend stocks listed here. Therefore, here are some ways to tweak the criteria for today's screen to collect more great dividend names and buy at the right time when they are more undervalued.

- Adjust the criteria (P/E < 20) to (P/E < 25) or (P/E < 30), and buy only when they hit your desired entry price.

One stock that will appear after this tweak is Procter & Gamble (NYSE:PG), which pays a 3.23% dividend but trades at an overvalued 22.7X earnings.

- Adjust the criteria (Payout Ratio < 60%) to (Payout Ratio < 70%)

My limit is actually 70% and 60% was used in this screen as it is more conservative. Anyway, one stock that will appear after this tweak is Consolidated Edison (NYSE:ED), which pays a cool 4.37% dividend and trades at a slightly overvalued 14.5X earnings (only grows 3% year over year).

-Adjust the (Dividend Yield > 3%) to (Dividend Yield > 2.5%)

Adding some 2.50%-2.99% dividend stocks may also make your portfolio more diversified and more risk-averse, as a result. Some great dividend stocks that will appear after this tweak are Aflac (NYSE:AFL), which pays a 2.66% dividend and trades in the neighborhood of 8X earnings; Coca-Cola (NYSE:KO), which pays a 2.69% dividend but is overvalued at the moment in my opinion, at 19.8X earnings; 3M (NYSE:MMM), which pays a 2.60% dividend at the moment and is fairly valued at 14.5X earnings; and Exxon Mobil (NYSE:XOM), which pays a 2.59% dividend at the moment and looks fairly priced at 9.3X earnings.

-Adjust the (> 25 years of consecutive dividend increases) to (>10 years of consecutive dividend increases)

More than 10 years of dividend increases is my personal limit, nothing below 10 years for my dividend portfolio. Anything below 10 years could see dividend decreases in the short term as the companies may not be as committed to their dividend as compared to their other dividend-increasing counterparts. Some great stocks that would appear here would be Novartis (NYSE:NVS), which pays a 4.01% dividend and looks fairly valued at 17.5X earnings; United Technologies (NYSE:UTX), which pays a 2.68% dividend and is fairly valued at 13.8X earnings; and Norfolk Southern (NYSE:NSC), which pays a 3.31% dividend and looks attractively valued at 11X earnings.

- Other Criteria

No other criteria can be tweaked. I want the company to have at least a minimal 3% growth over the past 5 years, then only it can sustain its dividend over the years to come.

The Takeaway

I find dividend stocks a very good source of income, especially to combat inflation to create a good retirement portfolio for the long term. But, some of the prices of these dividend stocks are overvalued and it may not be a suitable time to buy them now. Even for those that are fairly valued, I have a desired entry price for them as one will be able to buy a few more shares in them compared with the current entry price, and this will make a big difference in the long term. Even so, please still do your due diligence before investing in any stocks.

Explanations For Terms Used

For the explanations of terms used, look at the bottom of this article.

All information were sourced form Finviz, MSN Money, Gurufocus, and Yahoo! Finance. All prices and figures are based on the 28 November 2012 closing price. The "Target Short Term Entry Prices" mentioned in the article may or may not be followed.

Additional Disclosure: My dividend portfolio is still in the process of being constructed and I may initiate positions in any of the stocks above in the near future, but it may not be in the next 72 hours.

Disclosure: I am long GPC, MCD, CVX, XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.