5 Ideas For Dividend Growth And Consistency In Retirement

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Includes: CAT, EMR, PBCT, PPL, QCOM
by: Doug Carey

Summary

Stocks with long dividend-growth histories -- and trading at reasonable prices -- are out there. We give our thoughts on a few such stocks below.

Resilient stocks like these can help investors weather recessionary times, both financially and psychologically speaking.

Decreasing portfolio volatility can increase the probability of a retirement plan's success.

Market volatility can be nerve wracking for sure, especially if you're in or near retirement. But it can also lead to some valuation anomalies: high-quality, high-yielding companies on sale. So we've done some screening to find some.

We started by looking for domestic large-cap stocks currently yielding at least 4% but not more than 10% (to shake out any potentially distressed or marginal companies).

Next, we looked for companies with 10 or more straight years of increasing dividends. This means, among other things, that these firms were able to weather the last major market downturn circa 2008 without a break in increasing rewards to shareholders. (Past performance is no guarantee, et cetera, but this is a pretty good indicator of a company's strength.)

Then we looked for forward price/earnings ratios (based on analyst consensus estimates) that are less than or equal to that of the forward price/earnings ratio of the S&P 500 (which was approximately 15.7 as of January 15, according to Birinyi Associates).

We also took midstream oil and gas companies out of the picture. Some of these firms have strong balance sheets, long histories of increasing dividends (or partnership distributions), and attractive valuations right now (Enterprise Products Partners (NYSE:EPD) stands out in this regard). But we reluctantly took these companies out after determining that investing in them while energy prices are still falling could lead to more volatility than investors in or near retirement would find acceptable.

Finally, we wanted to see companies with proven competitive advantages -- a subjective criterion to be sure, but we believe pretty easily defended for the investments we've chosen.

Name

Ticker

# Years Increasing Dividends

Current Yield (1/21/2016)

Caterpillar

CAT

22

5.12%

Emerson Electric

EMR

59

4.42%

PPL Corp

PPL

14

4.57%

People's United Financial

PBCT

23

4.62%

Qualcomm

QCOM

13

4.05%

Click to enlarge

Several of the usual dividend-income suspects made it through the screen: Southern Co (NYSE:SO), Duke (NYSE:DUK), AT&T (NYSE:T) and Verizon (NYSE:VZ). These companies are appropriate building blocks for nearly any dividend-oriented portfolio and, at least right now, could be considered reasonably priced.

But we wanted to highlight a few ideas that might be less obvious (as less obvious as large-cap dividend payers can be, anyway) for defensive positioning.

Caterpillar (NYSE:CAT): What?? Invest in a construction equipment company stock at this stage in the economic cycle? That seems to be what the market is asking, with Caterpillar trading near 5-year lows. But a 5% yield on the back of 22 years of increasing dividends should be of some comfort.

Click to enlarge

Emerson Electric (NYSE:EMR): 59 years of increasing dividends and a fat yield. Energy sector exposure is weighing on the stock now, but at least you'll likely be paid to wait for things to turn around there.

PPL Corp (NYSE:PPL): PPL Corp is mostly your garden-variety utility holding company -- and, with a nearly 5% yield, there is nothing wrong with that. Technically a US-based company, much of its earnings come from the UK, offering a bit of geographic diversification.

People's United Financial (NASDAQ:PBCT): Higher interest rates should help this regional S&L holding company that has posted nearly a quarter century of shareholder-friendly dividend increases.

Qualcomm (NASDAQ:QCOM): How about some high-yielding technology exposure? Qualcomm's patent portfolio -- and the royalty income deriving from it -- gives it some downside protection.

There are three benefits to finding companies such as these: 1) Their dividend payments keep on rolling in, even in recessions (and many times even with dividend growth); 2) Many times the stock prices do not decline as much as most equities in a recession; and 3) the volatility of solid dividend payers is usually much lower than stocks that don't pay a dividend or have a small dividend yield.

Given this, I looked at two retirement portfolios in our publicly available retirement planning software that answers the question when can I retire? The first portfolio invested only in an S&P 500 index fund. The volatility (standard deviation) for the S&P has been about 17% over the past 10 years. I then replaced the S&P 500 fund with my dividend-growth stocks. I lowered their standard deviation assumption by 33%. So the standard deviation for my dividend payers is 10.7%.

In a typical retirement plan I find that the probability of success increases by about 22% when switching to less volatile dividend-growth stocks. This is a large jump, solely due to the fact that they are now invested in more stable, solid dividend paying stocks instead of an equity index fund.

Another benefit to investing in dividend-growth stocks for retirement is that the principal value of dividend-growth stocks becomes nearly meaningless if held long enough because their dividend payments become the major portion of the total return over time. So fluctuations during recessions do not impact investors nearly as much, either monetarily or psychologically.

One quick note: There are not any consumer-staple companies on our list. It should go without saying that such companies belong in any defensive equity-oriented portfolio, but the Coca-Colas (NYSE:KO) and Altrias (NYSE:MO), some of which have very long histories of increasing dividends and at faster rates than the companies we have listed, either did not meet our valuation or yield criteria.

Disclosure: I am/we are long 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.