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This holiday season, give yourself the perfect gift: a growing source of retirement income. Whether you are currently retired, years away from retirement or about to take the leap -- one thing you likely need to think about is how to supplement your social security, pension or annuity income. As we transition into retirement, most of us are seeking answers as to how to provide additional supplemental income.

Dividend Paying Stocks

Cash dividends from stocks can provide the needed retirement supplemental income. Dividend payments are not guaranteed… but with a little effort, even the novice investor can build a portfolio of dividend paying stocks with a high probability of a continued and growing income stream.

The criteria: I searched for stocks with a record of at least 35 consecutive years of dividend payments. Further, the stocks on my wish list had to have at least 15 years of continuous dividend increases and a 5-year dividend growth rate exceeding 8%. Current annual dividend yield must exceed 2.7%, and the dividend payout ratio may not exceed 59% so there is further room for dividend increases. Finally, because I am seeking names that efficiently use invested capital, my list requires a return on equity (trailing 12 months) in double digits.

Many solid long-term dividend growth names were eliminated with the requirement that the payout cannot exceed 59 percent, including Johnson and Johnson (NYSE:JNJ) with a payout ratio of 79%, Proctor and Gamble (NYSE:PG) with a payout ratio of 62%, and Emerson Electric (NYSE:EMR) with a 60% payout ratio -- even though they met all the other criteria. American States Water (NYSE:AWR), 3M Company (NYSE:MMM), and Diebold, Inc (NYSE:DBD) were also eliminated because they didn't meet the dividend growth rate requirement, even though they met the other criteria AND they've all increased dividends for more than 50 years.

The five stocks making the cut:

  1. Chevron (NYSE:CVX)
  2. Automatic Data Processing (NASDAQ:ADP)
  3. The Coca-Cola Company (NYSE:KO)
  4. McDonald's (NYSE:MCD)
  5. PepsiCo (NYSE:PEP)

Criteria Chart

CVX

ADP

KO

MCD

PEP

Annual yield

3.3

3.0

2.7

3.5

3.1

Payout ratio

28%

56%

52%

53%

56%

Years increase

19

36

50

35

40

5 yr growth rate

8.4%

11.7%

8.4%

14%

8.4%

Roe ttm

18.9

22.5

26.2

40.

26.1

Dividends paid since

1912

1974

1893

1976

1952

Source: Yahoo Finance closing prices 12/17/12

More about the five selected stocks. This is a rare grouping of stocks because of the criteria outlined in the above chart. Long-term dividend payers with significantly above average dividend growth rates and modest payout ratios make these attractive candidates for a do-it-yourself retirement portfolio. In addition, each of the stocks selected has characteristics that make them solid investments. The concepts I find important as business drivers are briefly examined below.

Chevron

Many of us know Chevron as a petroleum retailer. But the company engages in energy operations across the globe in power generation plus discovery, development, manufacturing, mining, production and marketing crude oil, gasoline, natural gas, and chemicals. The company is the second largest oil company in the United States after Exxon Mobil Corp. Earlier this year, Chevron announced its capital budget for 2013, increasing it 12% over 2012 to $36.7 billion (and up 70% from 2010) in an effort to increase its worldwide production of oil and natural gas from 2.52 million barrels a day to 3.3 million barrels a day by 2017. This increased supply with implied added revenue should be a catalyst for the stock and a factor in continuing dividend increases into the future. One of the negatives holding back the stock recently has been a series of lawsuits relating to Brazilian oil spills. A settlement was secured on December 17, 2012 whereby Chevron will pay $155 million, eliminating this overhang.

At a December 19, 2012 closing price of $109.91, the Chevron P/E of 9.05 is slightly below that of competitor Exxon Mobile, which is at 9.37. Chevron is currently priced right at its 200 day moving average of $109, however, it has had a muted 52-week growth of 4.4% compared to the 52-week change of 7.75% for Exxon Mobile, whereas the S&P 500 has experienced a 16.3% 52-week change.

Automatic Data Processing

ADP holds the dominant market share in employment administration outsourcing solutions, including payroll processing, payroll tax filing, 401k plan and benefit administration, HR guidance and management. The $28.3 billion market cap company has operations across the United States, Canada, Europe, South America, Australia and Asia. Although this company is a stand-out in many ways, including balance sheet cash of $1.15 billion against total debt (short and long term) of $459 million, one of the facts I find most interesting about the company is the built in barrier to turn-over of its client base. Because ADP carries y-t-d cumulative information on clients' employees such as earnings, deductions, 401k contributions, tax and insurance withholdings, imagine the headache if a company wishes to switch payroll processing providers! Two other factors are rather unique to this business model. First, the company is able to take advantage of a cash float from the time money is withheld from an employee until the money is dispersed to the government for taxes or insurance company for premiums and the like. And second, the company is able to successfully cross-sell services once it ingrains itself with a company. New initiatives continue to be added, which include customer relationship management applications, front end sales and marketing solutions, digital marketing solutions such as website management, email management, sales leads, and social media management, to name a few.

ADP is truly the leader in this category. Compare trailing 12 months revenue of $10.8 billion to nearest competitor Paychex (NASDAQ:PAYX) at $2.24 billion. Additionally, one does not need to pay a premium for the market leader... the P/E of ADP is 20.5, below that of PAYX 21.7.

Stock price movement of ADP with a 52-week change of 8.5% has not kept up with the 52-week change of 12.5% for PAYX, or the S&P 500 increase of 16.3%. This could very well be a positive for ADP and future price movement.

Coca-Cola Company

Coca-Cola is the most recognizable brand in the world, according to the 2012 Interbrand Report. The scale of the company astonishes… Coca-Cola products are sold in every country on the planet, except North Korea and Cuba. Robert Goizueta, chairman and CEO of the company from 1980 until his death in 1997, is largely credited with invigorating the company with a global vision. In 1985 he famously said:

"A billion hours ago, human life appeared on Earth. A billion minutes ago, Christianity emerged. A billion seconds ago, The Beatles performed on The Ed Sullivan Show. A billion Coca-Colas ago was yesterday morning."

As of 2011, "yesterday morning" would be 1.7 billion Coca-Colas ago. See my full SA article examining Coca-Cola here.

Coca-Cola has had a 52-week increase of 7%... below the S&P 52-week increase of 22%. This could imply room for growth. In addition, its P/E is of 19 is below the soft drink industry average of 22, but slightly above its key competitor, PepsiCo, which is at 18. Coca-Cola is currently priced at $36.78 (closing 12-19-12), below both its 50 day and 200 day moving average of $37.19 and $38.07, respectively.

McDonald's Corp.

McDonald's Corporation franchises and operates McDonald's restaurants. The footprint of the $90.6 billion market cap company now exceeds 34,000 restaurants in 119 countries across the globe. McDonald's serves 69 million customers daily. One distinguishing characteristic that makes the company so successful is that 80% of its units worldwide are operated by franchisees that often live and work in the local community the restaurant serves. This helps make the restaurants relevant to the local community, and allows the franchisee to identify local opportunities for enhancing revenue.

McDonald's is known for its constant advertising presence on radio and television in the United States. It has successfully built its business by using clever and iconic long-term electronic media advertising campaigns. McDonald's has replicated this effort across the globe. Further, the company has been a leader in new media, as evidenced by the 71 different websites operated in local languages around the world.

McDonald's annual revenue of $27.4 billion is 10 times that of competitor Burger King (NYSE:BKW) with $2.1 billion, and more than double that of YUM Brands (NYSE:YUM) with $13.5 billion. In addition, McDonald's P/E ratio is significantly below that of YUM Brands -- 16.9 vs. 19.8, respectively. Competitor Burger King went public mid-year.

McDonald's has suffered a 52-week decline of -8.75% compared to the S&P increase of 16.3%. Recent same store sales metrics have been positive for the company, indicating growth has returned.

PepsiCo

PepsiCo is a global food and beverage company. It manufactures, markets and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products and other foods.

In an effort to strengthen its business through R & D, PepsiCo recently opened its largest research and development facility outside of the United States in Shanghai, China. Because Asia and other emerging markets are home to some of the world's fastest-growing food and beverage markets, China and this new facility may be an engine of growth for the company.

PepsiCo products are sold in 200 countries. The company's portfolio includes 22 brands that each generates in excess of one billion dollars in revenue annually.

The PepsiCo current P/E of 18.6 is considerably below the industry average of 22, and also below its key competitor Coca-Cola, which is at 19. The PepsiCo 52-week price has increased 6.8%, well below the S&P 52-week increase of 16.3%. The stock is currently priced in line with its 200 day moving average.

Conclusions

Each of these five companies would be familiar to most people. Successful, conservative investing doesn't require one to seek out names they've never heard of before or stretch for yield with companies that have been delivering payouts for a short period of time. Each company profiled offers a dividend reinvestment program and most have a direct stock purchase program. Making regular share purchases and reinvesting dividends can really add up over time. In retirement, my experience is one goes from the accumulation stage (by reinvesting dividends) to the supplemental income phase by taking the cash dividends. These are the kind of companies sought by retirees like myself that provide a consistent and growing income stream over time.

Source: 5 Stocks With Growing Dividends On My Holiday Wish List