Are you nearing retirement? If so, that doesn’t necessarily mean you have to see your income decrease. By investing in dividend stocks, you could build a source of passive income that can help you sustain your lifestyle. However, as a retiree, it’s crucial that you focus on blue-chip stocks. That could help you generate cash flow via dividends, while protecting your initial investment.
In this article, I’ll discuss three top picks for a passive-income portfolio. I’ll also explain what characteristics these companies hold that make them great.
Look for a long history of dividend growth
The first thing that retirees should look for in a dividend stock is how long a company has been able to increase its dividend distribution. This is important to consider, because it could indicate whether a company has disciplined capital-allocation practices.
One way to find companies that have a history of raising dividends is by consulting the list of Canadian Dividend Aristocrats. Simply put, these are companies that have managed to increase their dividend distribution for the past five years.
One thing that’s great about that list is that it also shows whether a company’s been able to exceed that minimum five-year requirement. For example, take a look at Fortis (TSX:FTS). This company holds the second-longest active dividend-growth streak in Canada (49 years). The company has also announced that it plans to continue raising its dividend at a rate of 4-6% through to at least 2027. If you’re starting a dividend portfolio in retirement, Fortis is the first stock I’d consider looking at.
A stock’s dividend-growth rate is important
Investors should also consider how fast a company has been able to grow its dividend. This is an important characteristic to consider because a stagnant or slow-growing dividend could result in the loss of buying power. On average, inflation tends to rise at an annual rate of about 2%. With that in mind, investors should focus on stocks that raise dividend distributions by at least 2%. I try to look for companies that have a dividend-growth rate of 10% or more.
goeasy (TSX:GSY) is an excellent example of a company with a fast-growing dividend. In 2014, the company paid out a quarterly dividend of $0.085 per share. Today, goeasy’s quarterly dividend is $0.91 per share. That represents a compound annual growth rate of more than 34% over the past eight years. There are many stocks that have outstanding dividend growth rates, but goeasy stands very close to the top.
When in doubt, look for a long history of dividend payments
Although a long history of dividend growth or high dividend-growth rate would be great to find, not every company possesses those characteristics. There are some outstanding dividend stocks that have great histories, while not possessing those two traits. In my opinion, those stocks would be great to hold anyway, as they could help support the other dividend stocks in your portfolio.
Bank of Nova Scotia (TSX:BNS) stands out as a perfect example here. This company has been paying shareholders a portion of its earnings since 1833. That represents 189 continued years of dividend payments. Bank of Nova Scotia doesn’t have the same track record regarding dividend growth as Fortis or goeasy. However, its long history of paying shareholders suggests that this company could be a reliable stock to hold in a passive-income portfolio.