Editor’s note: This article was first published in December 2015. All figures are from then: J&J’s 53 consecutive years of dividend increases and 3.12% yield, Verizon’s 5% yield and data forecast for 2020, and Spectra Energy’s 6% yield and 38% fall in 2015.
When we build a long-term investment portfolio with the aim of creating an asset that generates passive income up to and/or during retirement, we can’t overlook the need to include stocks that pay good dividends and, most importantly, whose dividends keep growing as profits are expected to rise steadily.
If we stop to think about it, when we hold our money in shares with retirement in mind, we shouldn’t forget that although shares tend to grow over the long term, it could also happen that a recession coincides with the very moment we retire, and that it isn’t a good time to sell. In that scenario, and without always needing to sell our shares, we could receive quarterly, half-yearly or annual income from dividend payments and, once the market recovered, go ahead and sell the shares, if that’s our goal.
To do this, we should choose stocks that, as Benjamin Graham showed in the bible of investing, The Intelligent Investor, have a record of consistently growing dividends. That is the best indicator of a company’s health, regardless of whether its share price moves up or down.
With that in mind, several analysts at Fool.com have studied a number of companies with an excellent track record in this respect, some of which have been growing gradually and raising their dividends for several decades. So, if the trend continues, they will most likely keep increasing their dividends. That makes this type of stock essential in a long-term portfolio built for retirement.
(See: 5 recommended books on investing and the stock market)
Johnson & Johnson (NYSE: JNJ)
According to analyst Kristine Harjes, this company holds the record among healthcare companies, with 53 consecutive years of annual dividend increases, and a current yield of 3.12%.
This company is much more than a maker of hair products and shampoos. Standard & Poor’s considers J&J to have more financial strength and discipline in meeting its obligations than the US government itself, having given it a AAA credit rating.
It has increased its earnings for 31 consecutive years, and everything suggests it has plenty of room to keep raising its dividends to shareholders.
It’s a company that remained stable through the crisis, and over the last 10 years its shares have risen gradually by 67%.
The outlook for this company is bright, because its focus on new pharmaceutical products will significantly boost its revenue. On top of new products that have been well received, such as anticoagulants, diabetes treatments and cancer therapies, there are its plans to bring 10 new products to market by 2019, each with the potential to generate more than 1 billion in revenue, according to Harjes.
Verizon Communications (NYSE: VZ)
Although this is a technology company, it isn’t a typical tech company. According to analyst Dylan Lewis, Verizon offers three clear advantages:
- The company operates in an industry with high barriers to entry, meaning an industry that is very hard for future competitors to break into.
- It has many different paths to keep growing.
- It has a history of sustainable dividend payments.
That makes it one of the few tech companies that could pass a value investing analysis.
Verizon Wireless is the leading network in its industry for performance, reliability and speed. Smartphones in North America use an average of 2.4 GB of data a month. That figure is expected to rise to 14 GB by 2020, and Verizon is strategically placed to benefit from that increase in data.
But mobile data consumption isn’t Verizon’s only growth driver. With its ThingSpace initiative, the company is positioning itself to enable machine-to-machine (M2M) connections and provide applications to control devices. This industry is estimated to be worth 1.7 trillion by 2020.
It’s the tech company that pays the highest dividends to its shareholders, and everything suggests it’s in a position to raise them every year, as it has been doing so far. At the moment, Verizon has a dividend yield of 5%.
Spectra Energy (NYSE: SE)
The report also includes Spectra Energy, a company that currently has a 6% dividend yield, an energy company that will be very profitable as long as the United States keeps consuming natural gas.
In fact, in 2015 its shares fell 38% because of the drop in oil and gas prices, although the company’s revenue has held steady. If we bet on it, taking advantage of the price drop could clearly be a good idea with a long-term view.
My favourite?
All three companies are very attractive. But if we’re looking for safety and steady long-term growth while taking on hardly any risk, the favourite for the extremely conservative investor would undoubtedly be Johnson & Johnson.
Let’s say that, along with Coca-Cola, conservative people who realise fixed-term deposits no longer pay but are afraid of equities would, with this company, be in equities but with added security, given the company’s track record.
For potential capital gains and a higher return in a shorter time, it would undoubtedly be Spectra Energy, although there’s a lot of turmoil in Spectra’s industry these days, so I assume it carries somewhat more risk; then again, it does have a stable dividend history and, in principle, its profits have remained stable.
As for Verizon, it operates in an industry I don’t know well at all, so I could only go by the analysts’ judgement.
See also: How to invest when you’re young or have no experience
Featured image: Coolcaesar, CC BY-SA 3.0, via Wikimedia Commons.
