Retirement planning is a significant challenge for many Americans. But many retirees are facing a major shortfall in retirement income.
Several decades ago, retirement planning was based heavily on pensions. Over time, companies gradually did away with pensions, in favor of 401(k) plans.
The shift from defined benefit to defined contribution plans has not worked out as hoped.
According to the U.S. Census Bureau, two-thirds of all Americans are not contributing anything to a 401(k) or other retirement account, available through their employer.
Without sufficient retirement savings, many economists believe the U.S. is on the verge of a “retirement crisis”.
It is imperative for Americans to supplement their retirement income—for many, Social Security will not be enough, given the rising costs of senior housing and health care.
Fortunately, there is a solution: dividend stocks.
Here are three high-quality, blue chip dividend stocks, that can help savers generate income for retirement.
Rock-Solid Dividend Stock #1: Johnson & Johnson
All three stocks on this list are members of an exclusive club: the Dividend Kings, a group of just 19 stocks that have raised their dividends for over 50 years in a row.
You can see the complete list of 19 Dividend Kings here.
Johnson & Johnson (JNJ) has increased its dividend for 54 years in a row.
The Dividend Kings are an even more impressive group than the widely-touted Dividend Aristocrats, which have raised their dividends for 25 or more consecutive years—half as long as the Dividend Kings.
You can see the full list of Dividend Aristocrats here.
Investors are likely familiar with J&J’s popular consumer brands, a few of which include Johnson’s, Neutrogena, Listerine, and Tylenol.
But J&J’s crown jewel is its pharmaceutical business.
Sales of J&J’s pharmaceutical products rose 7% last year, which was far stronger growth than its consumer and medical device businesses.
The company has a number of pharmaceutical products that generate $1 billion or more in annual sales, particularly in the areas of immunology and oncology.
For example, Remicade is a $7 billion drug in terms of annual revenue. Sales of Remicade increased 6% last year. Separately, Stelara is a $3.2 billion product, after growing by more than 30% in 2016.
The pharmaceutical business drove 9% growth for J&J’s total adjusted earnings-per-share for 2016. In 2016, J&J generated $72 billion of total sales, and $17 billion of net income.
According to the company, J&J has produced five-year and ten-year compound annual revenue growth of 2% and 3%, respectively.
J&J generated $15.5 billion of free cash flow last year, slightly more than half of which was used to pay dividends.
The stock has a current dividend yield of 2.6%, which could be about to rise.
It has been one full year since J&J’s last dividend increase, which the company typically announces at its annual shareholder meeting. This year’s meeting is scheduled for Thursday, April 27, which means J&J’s 55th consecutive dividend increase could be only a couple of weeks away.
Rock-Solid Dividend Stock #2: 3M
3M (MMM) is a global industrial giant.
Normally, industrials have a difficult time maintaining long histories of dividend increases, due to the cyclical nature of the business model.
Industrial firms are tethered closely to the global economy. They are widely perceived as economic ‘bellwethers’, which should make it difficult to raise dividends during a recession.
However, 3M has come through with 58 years of consecutive dividend increases. Last year, it increased its dividend by 8%.
With its remarkable consistency, 3M handily beats General Electric (GE) in terms of dividend track record and growth.
It has done this with a highly-diversified business, that caters to virtually every major industry group. 3M generated more than $30 billion in sales last year, spread across the following five segments:
Industrial ($10.3 billion, 33% of total sales)
Safety & Graphics ($5.6 billion, 19% of total sales)
Healthcare ($5.5 billion, 18% of total sales)
Electronics & Energy ($4.8 billion, 16% of total sales)
Consumer ($4.4 billion, 14% of total sales)
2016 was a challenging year for 3M. Global industrials got hit with the strong U.S. dollar, as well as the impact of low commodity prices. In addition, industrials grappled with slowing economic growth in emerging markets, such as China.
However, 3M’s currency-neutral sales dipped only 0.1% for the year.
Four out of the company’s five segments posted organic revenue growth, with only electronics & energy seeing a 7.5% sales decline.
Geographic diversification also helps 3M. Last year, organic sales in Latin America & Canada increased 3%, while sales in the U.S. rose 1%.
Plus, 3M’s bottom line is aided by the company’s massive scale. A lean cost structure and renewed emphasis on efficiency helped the company’s earnings-per-share increase 8% in 2016.
The company expects 4%-8% earnings growth in 2017, which will be more than enough growth to continue raising its dividend.
3M has a current dividend yield of 2.5%.
Rock-Solid Dividend Stock #3: Colgate-Palmolive
Colgate-Palmolive (CL) is a Dividend Aristocrat and Dividend King, with dividend increases for 54 years in a row. The company started paying dividends in 1895—more than a century ago.
It has maintained its impressive dividend history, by building strong brands with durable competitive advantages.
The company operates in three core segments, which are toothpaste, soap, and animal health.
Some of its most well-known products include Colgate, Palmolive, Softsoap, Irish Spring, and Hill's Science Diet.
These are all very stable categories. Even during economic downturns, people still need to buy soap, brush their teeth, and feed their pets.
This has provided the company with a very defensive business model, that is highly recession-resistant.
For example, consider Colgate-Palmolive’s performance during the Great Recession:
2007 Earnings-per-share of $1.69
2008 Earnings-per-share of $1.83 (8% increase)
2009 Earnings-per-share of $2.19 (20% increase)
Colgate-Palmolive performed extremely well during the last recession, putting up 20% earnings growth in 2009.
Although the company was dragged down last year by the strong U.S. dollar, it still generated 4% currency-neutral sales growth in 2016.
Much of this growth was due to price hikes—Colgate-Palmolive generated 2.5% revenue growth from pricing increases, which demonstrates the company’s pricing power and brand strength.
Going forward, Colgate-Palmolive’s long-term growth will be fueled by emerging-market expansion. The emerging markets represented 49% of the company’s total sales last year.
This growth should help provide for plenty of future dividend increases.
Colgate-Palmolive generated $2.5 billion of free cash flow last year, and paid $1.5 billion of dividends.
The company has a current dividend yield of 2.2%, which is slightly above the 2% average yield in the S&P 500 Index.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.