3 Dividend Stocks Perfect for Retirement – Motley Fool

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Dividend stocks can be reliable sources of extra income for retirees, but like any equity, they’re never going to be totally free from risk. So it’s important to weigh a dividend stock’s risk profile against its ability to provide a steady stream of income for long periods of time.

Keeping this theme in mind, we turned to our contributors to ask them which dividend stocks they think are perfect vehicles for retirees. They suggested Bristol-Myers Squibb (NYSE:BMY), Target (NYSE:TGT), and Seagate Technology (NASDAQ:STX). Read on to find out why these three stocks might be stellar income stocks for retirees. 

A roll of cash sits next to a tiny sign that reads 'dividends,' held up by a stick.

Image source: Getty Images.

This big pharma is a great source of passive income

George Budwell (Bristol-Myers Squibb): Pharma stocks in general tend to be outstanding sources of passive income because of their extraordinary free cash flows and exceptional growth prospects. But Bristol-Myers Squibb is arguably in a class by itself — even within this elite group — because of its recent pivot toward immuno-oncology and cardiovascular care.

The long and short of it is that Bristol’s top line has been growing by double digits lately as the result of its highly successful PD-1 inhibitor Opdivo that’s indicated for a variety of cancers, along with the breakout success of its next-generation blood thinner, Eliquis. In the first quarter of 2017, for example, these two drugs saw their sales grow by an astounding 60% and 50%, respectively, relative to 2016.  

As a direct result, Bristol’s 12-month trailing payout ratio has now fallen to only 53%, which is rock bottom for a pharma stock. So while Bristol’s current yield of 2.87% is below average with its peer group, the company can — and probably will — up its payout soon. Equally as important, Bristol’s dividend appears to be sustainable for the long haul, making it an outstanding source of passive income for retirees.  

Hit the target with this stock

Dan Caplinger (Target): The retail industry has gone through some tough times, and even stalwarts like Target have been struggling to find ways to get through difficult conditions. Target stock is at levels the company hasn’t seen in more than five years, and some investors are concerned that the retailer won’t be able to withstand the pressures from e-commerce specialists and other competitors. Companies that don’t have brick-and-mortar locations enjoy substantial cost savings over the vast amounts that Target has to spend on its store footprints. Meanwhile, even other big-box retailers have striven to build up their online presence, threatening to leave Target behind. Yet Target is working hard to answer those challenges, with programs like Target Restock aimed toward meeting consumer demand for quick turnaround on delivery items.

Historically, Target has been able to thread the needle between offering inexpensive goods while maintaining a reputation for trendy products. Along the way, Target has treated its investors well, paying rising dividends each and every year for just shy of half a century. Target stock now yields more than 4%, reflecting the drop in the share price recently. Yet that offers investors a nice payout while they wait for better conditions in the retail industry to take shape. Unless you think that retail as we know it will cease to exist, Target makes a solid choice for retirement investors looking for income.

Seagate’s a tech stock, a value stock, and a dividend stock all rolled into one

Rich Smith (Seagate Technology):You might not ordinarily think a tech stock is a great thing to own in retirement — but that really depends on the tech stock. Me, I think Seagate Technology looks just about perfect for retirement. Here’s why.

If you’re retired, chances are you aren’t going to spend a lot of time worrying about whether your stock is up or down, or trading in and out based on the twists and turns of the market. You’ll be too busy traveling, catching up on your reading, and spending time with the grandkids to indulge in day-trading distractions. So long as the dividend checks keep coming — and so long as they’re generously large — you can afford to not sweat the small stuff and let your money ride on a great company.

That’s why a “volatile” stock like Seagate, which can both soar when computer memory prices are high and swing low when the market is flooded with memory and prices are low, could nonetheless be a perfect stock for a retiree willing to buy it, hold it, and cash the dividend checks as they come in. Right now, for example, with NAND memory supplies tight, and hard drive prices rising, Seagate stock is soaring — up 80% over the past year. Seagate is profiting from this trend, even as archrival Western Digital is showing negative profits.

Granted, priced today at 17.4 times earnings, Seagate doesn’t look particularly cheap — but analysts project that the trends benfiting Seagate will yield 18.9% long-term earnings growth at the company, which does work out to a cheap-sounding 0.9 PEG ratio. More importantly, Seagate boasts exceptionally high earnings quality, with each $1 of “GAAP” earnings backed up by more than $2 in cash profits. Free cash flow at the company for the past 12 months ran to $1.5 billion — twice reported earnings.

Topping it all off, Seagate pays an admirably high dividend yield of 5.9%. With $3 billion worth of cash in the bank, $1.5 billion more rolling in the door annually, and strong growth prospects ahead, Seagate is a dividend stock — and a tech stock — that’s just perfect for retirement. 

Dan Caplinger has no position in any stocks mentioned. George Budwell has no position in any stocks mentioned. Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.