Nearing Retirement? Buy These 3 Stocks to Generate Passive Income


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Parking some percentage of your money in dividend-paying stocks can be very rewarding. Some top consumer brands have paid dividends for decades (a few for more than a century). This provides a way to keep your money invested in stocks that can grow your holdings over time, while still earning cash income in the short term. In other words, you can maintain a cash cushion for as long as you need it with well-chosen income stocks.

Three Motley Fool contributors recently picked McDonald’s (MCD 0.57%), Home Depot (HD 1.63%), and Procter & Gamble (PG 0.61%) as good places to start generating passive income. These companies make products people use every day and won’t become obsolete any time soon. Let’s find out a bit more about these three dividend stocks.

1. McDonald’s provides an income stream in good times and in bad  

Parkev Tatevosian (McDonald’s): Passive income at regular intervals with no definite end date can go a long way to make retirement more enjoyable. One of my favorite passive income sources right now is McDonald’s stock. The company pays a quarterly dividend that has risen substantially over the years. 

Annually, McDonald’s paid a dividend per share of $2.87 in 2012. That figure rose to $5.25 by 2021. The current dividend (when annualized) is $5.52 and yields 2.16%. Over the past decade its risen 7.9% a year on average. Today’s investors can reasonably expect their dividends from McDonald’s to continue growing over the next several years. That’s because dividends are paid out of a company’s profits, and McDonald’s has a long history of generating (and increasing) profits. The company’s dividend payout ratio is a manageable 66%. During the same time frame mentioned above, McDonald’s earnings per share rose from $5.36 to $10.04 (8.7% annualized). Management made improvements to the business, like investing in digital ordering, that help sustain the increase in profitability.

Moreover, since McDonald’s sells affordable items, it reduces the risk of losing customers during recessions. On the contrary, more consumers may choose McDonald’s over pricier away-from-home eating options when budgets get pinched. If I were nearing retirement age, I would want this Dividend Aristocrat in my investment portfolio. 

2. Home Depot: A reliable and growing dividend plus growth

Jennifer Saibil (Home Depot): Dividends are popular among several investing cohorts, but most retirees look to dividends as a real income source to replace missing wages. That means the yield isn’t the only factor they need to account for. Retirees also need dividends that are stable and growing, so they can count on passive income that can keep up with inflation.

Home Depot is an excellent choice for dividends because of its high yield, growth, and reliability. The dividend yields 2.5% at the current price, and the dividend itself has been raised consistently for the past 10 years. The annual dividend has gone from $1.16 per share in 2012 to $7.60 per share in 2022. That’s a 55.5% annual increase over that timeframe. The current dividend payout ratio is a very manageable 43.6%, suggesting plenty of wiggle room for future growth.

HD Dividend data by YCharts

Home Depot is the largest home improvement retailer in the world both by store count and sales, and it has been investing in its growth over the past few years to stay relevant and maintain its lead. Right before the pandemic, the company spent more than $1 billion on upgrading its omnichannel network. That resulted in depressed profits at the time, and some investors lost confidence, sending the stock price down. But the company was well prepared for the sales surge in the early months of the pandemic, and it was able to offer competitive in-store and digital shopping options and meet the strong demand. Profits have since soared, and management continues to invest in improved distribution and ordering systems. Home Depot raised its fiscal 2022 guidance (the fiscal year ends Jan. 31) after a better-than-expected performance in the first quarter, and revenue increased 6.5% year over year in the fiscal second quarter (ended July 31) to $43.8 billion.

The hidden truth is that dividend stocks often provide some of the highest gains over time. Dividend stocks are typically well established and secure, and the companies generate enough cash to grow their businesses at scale. Even without its dividend, Home Depot stock has gained more than 364% over the past 10 years, giving shareholders even more of a reason to own it.

3. Procter & Gamble has paid a dividend for 132 years

John Ballard (Procter & Gamble): P&G’s strong consumer brand portfolio delivered respectable results for investors in a challenging year. Sales and profits grew, both increasing at mid-single-digit rates in fiscal 2022 (which ended in June). Although management expects a lower rate of growth in fiscal 2023, the stock remains a favorite for long-term investors for its exceptional dividend history.

The company has paid a dividend for 132 years and has raised the dividend annually for 66 consecutive years. It raised the payout another 5% in April of this year. At a current payout of $3.52 per share, the dividend yield is an attractive 2.57%. 

Management’s efforts to double down on more profitable product categories in recent years have paid off for shareholders. Better sales growth lifted the stock up 48% over the last five years. Improvements in packaging, marketing, and product performance should provide good visibility to sales. What’s more, management remains committed to cost efficiency in all areas of the business, which should continue to deliver solid profitability to fund further dividend increases for the foreseeable future. 

P&G pays out nearly two-thirds of its trailing-12-month free cash flow in dividends, giving it room to pay out a rising income stream for shareholders while it continues investing in the business’s future. At a forward price-to-earnings ratio of 23, P&G stock is not cheap, but it should perform roughly in line with the average return of the stock market while paying out an above-average yield.

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