I have explained in past articles why I believe that a diversified portfolio of dividend growth stocks is critical for retirement. Unlike other retirement vehicles, a steady, increasing stream of dividend income gives a retiree funds to live off of without diminishing capital. The key to such a method is determining which companies are most likely to be buy-and-hold-forever stocks.
Certain industries or business models simply don't translate to buy-and-hold-forever companies. Pharmaceutical companies are a good example of this, as they must continually develop new products and there is always a risk that any company could begin to fall behind the curve. As much as I believe a company like Pfizer (NYSE:PFE) is a good stock, it must continue to innovate and come out with the most effective drugs or otherwise risk losing a ton of market share and as a result, profits. The same goes for technology companies such as Intel (NASDAQ:INTC). I believe that Intel will be successful over the next 10 years as it continues to develop superior semiconductor chips. However, it is impossible to predict what the computer or mobile market will look like that far down the road. Intel needs to constantly adapt to changing technological trends and tailor products to meet those needs. This is why I would not feel comfortable simply buying and holding forever without doing a good amount of due diligence.
The key trait that I look for in ideal companies for a retirement portfolio is the ability for a company to "do nothing" and still be profitable and successful. Simply put, the ability of a company to continue to roll out basically the same product year after year without significant worry of a decrease in demand. Regardless of an inept CEO or volatile economic conditions, it would be very difficult for this company to not generate strong, consistent profits. Along with this characteristic, I also like to see a strong balance sheet with a relatively small debt-to-equity ratio. It is for this reason I don't believe banks to fall into my retirement stock category.
The following are a few companies that I consider buy-and-hold stocks, great for any retirement portfolio because of their long-term stability.
Altria Group Inc. (NYSE:MO)
Although I don't smoke and certainly don't condone it because of health risks, I can't imagine an industry with a more inelastic product line than tobacco companies. Cigarettes and other addictive products will always be purchased, whether the country is in recession or not. Barring legislation, Altria will never have to significantly alter its product line to comply with customer needs. All it has to do is simply keep manufacturing its popular brands such as Marlboro, Copenhagen, and Skoal to keep the cash flow coming in. Although there are more long-term risks associated with smoking, the taxes on these products are such a necessity to the government that I can't see anything happening in the near future. Also, Altria has diversified into the wine industry as well, which is certainly not going anywhere. With a dividend yield of nearly 5% and increases in each of the past 44 years, Altria is a solid pick for any long-term retirement portfolio.
The Coca-Cola Company (NYSE:KO)
Coke is the dominant player in the beverage and soft drink industry. It currently yields 2.7% and has raised its dividend for each of the past 51 years. Although the company has been expanding its product line to increase market share, the current products are classic examples of things that need no innovation whatsoever. In fact, there was tremendous backlash when the company tried to change the recipe for Coca-Cola in the 1980s. So basically, it would take Coke changing its actual product for the company to struggle. This is why I consider it to be one of the safest long-term holdings out there. The only threat would be increased awareness of the negative health effects of soft drinks, although I cannot see that derailing this strong of a brand. By branching out with other brands such as Powerade, Dasani water and Odwalla juices, Coke has ensured that it will be diversified enough to succeed in any environment in the future. As long as people are thirsty, Coke will continue to thrive.
General Mills, Inc. (NYSE:GIS)
General Mills manufactures and markets some of the most well-known branded consumer foods across the globe. I'm pretty sure that everyone has heard of Cheerios, Wheaties, Lucky Charms, Betty Crocker, Pillsbury, Yoplait, Bisquick, and Fiber One bars. These are incredibly strong brands that have been successful for years. Like Coke, General Mills does not need to alter the recipe for any of its products to stay successful. With General Mills' dividend yield of approximately 3% and debt/equity ratio of only about 2.15, I prefer it over competitor Kellogg (NYSE:K), which only yields 2.8% and is more aggressively financed with a debt/equity of over 5. I view GIS as a great retirement stock.
Procter & Gamble (NYSE:PG)
Procter & Gamble has been the definition of consistency over its storied history, as it has raised its dividend annually in each of the past 56 years and currently yields 3.1%. PG is a consumer goods behemoth, with multiple huge brands that generate billions of dollars in sales. The key with these brands is that they require very little or no innovation to keep them in a dominant market position. Popular shampoos such as Head & Shoulders and Herbal Essences have established strong customer loyalty and no longer require any significant amounts of R&D expenses to maintain and grow market share. Crest toothpaste is another item that P&G can rely on for years to come with no significant changes needed. Other household products by Procter & Gamble have similar stability and predictability in sales revenue, such as Bounty paper towels and Charmin toilet paper. Most of the massive brands owned by PG will be around for a long time, making it a great choice for a retirement portfolio.
It is important for any investor to do his or her homework on any potential or current investment to determine if it meets his or her objectives. Just because I feel that these stocks require little monitoring over the long term does not mean that they should be bought and forgotten. However, they will allow retired investors to sleep well at night knowing that the companies and their dividends are safe.
Disclosure: I am long INTC, KO, MO. 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.