3 “Retirement Paychecks” Yielding Up to 7.8%
September 5, 2019
These Dividend Stocks Provide Reliable Retirement Income
If you worry about having enough money saved for retirement, you’re not alone.
In a revealing study by Allianz Life Insurance Company of North America, 63% of respondents said they feared running out of money in retirement more than they feared death. Almost one in three American baby boomers said they did not feel financially prepared to leave the workforce. (Source: “Finally Feeling Better About Retirement, Optimistic Baby Boomers Offer Lessons for Younger Generations,” Allianz Life Insurance Company of North America, September 25, 2017.)
It’s easy to understand where this fear comes from. The biggest change that retirement brings is the absence of a regular paycheck. Watching your cash reserves slowly drain down can be jarring, even for someone with a sizable nest egg.
One solution: dividend stocks. With the right set of companies, retirees can create a steady stream of investment income. You can use these distributions to cover the bills and other daily expenses—and potentially still have enough income left over to fund a fulfilling retirement.
I’ve nicknamed these select dividend stocks “retirement paychecks.” These companies, first and foremost, enjoy entrenched market positions, which allows them to pay reliable distributions. Furthermore, they pay respectable upfront yields, making them perfect for those approaching, or already in, retirement.
To help get you started, I’ve highlighted three of my favorite income streams below. To be clear, this doesn’t constitute a list of “buy” recommendations, but it does provide a great jumping-off point for further research.
Hershey Co
Hershey Co (NYSE:HSY) represents the ultimate cash cow business. The chocolate industry matured decades ago, which leaves little need to reinvest in new property, plants, or equipment. And because the business earns almost $0.50 in gross profit on every dollar in sales, Hershey generates a lot of free cash flow.
What does management do with all of this money? Acquisitions. Over the past few years, Hershey has transformed from a pure candy maker into a snack foods powerhouse. Executives have spent billions of dollars buying small, fast-growing brands like “KRAVE,” “Amplify,” and “Pirate Brands.” These deals have further padded the bottom line, which explains why HSY shares recently touched fresh all-time highs.
Hershey, however, still generates far more cash than management can profitability invest. To solve this problem, executives have more than doubled the dividend over the past decade. The company also spends billions of dollars on shareholder buybacks, quietly reducing the total number of outstanding shares each year. This increases investors’ claims to future earnings, resulting in outsized capital gains.
RLI Corp
I have sometimes called insurance companies like RLI Corp (NYSE:RLI) the greatest businesses in the world, due to a quirk in the industry’s business model. Customers pay premiums up front, usually years before they file any claims. In the meantime, the insurance company is free to invest these proceeds as it sees fit—cashing any dividends, interest, and capital gains for itself. Warren Buffett calls these premiums “free money,” and I tend to agree.
So what sets RLI Corp apart from the pack? Its management seeks out obscure corners of the insurance market, covering everything from storage tanks and doctor’s offices to work injury compensation. Because these niches often face little competition, executives can earn robust margins on their underwriting operations.
As a result, RLI can fund a generous dividend program. Management has boosted the quarterly distribution for 44 consecutive years, raising the current payout to $0.23 a share. Executives supplement these payments further through annual special dividends.
I love this policy. Special dividends allow management to reward investors during a good year. And more importantly, it also allows executives to conserve cash in a downturn.
Preferred Apartment Communities Inc.
Many people dream of owning their own rental property. But for many of us, dealing with renters presents a big hassle. How many of us dream of spending our “golden years” screening tenants, chasing down rent checks, and fixing toilets at two in the morning?
Preferred Apartment Communities Inc. (NYSE:APTS) provides an answer to that problem. Over the past few years, management has assembled a sprawling portfolio of multifamily apartment buildings. And because these properties are centered in dense, urban areas, management has no problem raising rents each year.
This has created quite the income stream for unitholders. Since the trust went public in 2011, management has more than doubled its payout. Today, APTS stock pays a quarterly distribution of $0.26 per unit, which comes out to an annual yield of 7.8%.
