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In today’s investing climate, a retiree looking for income might feel like a king without a castle. Interest rates remain historically low, which means bonds and fixed income offer very little income. And, with the stock market racing to record highs, the average dividend yield in the S&P 500 Index has fallen to 2%.
However, there are still good sources of income to be found in the stock market. Investors should start with the Dividend Kings, an exclusive group of just 19 stocks. Each has over 50 years of consecutive dividend increases.
Think for a moment of how stable a company must be in order to raise its dividend each year for five decades running. The past 50 years included several wars and recessions. And yet, not only did the Dividend Kings maintain their dividends through troubled times, they continued to raise them each year.
Investors looking for stable, blue-chip dividend payers, should focus on these three Dividend Kings.
Dividend Kings: Johnson & Johnson (NYSE: JNJ)
J&J might just be the Dividend King to rule them all. It has a strong business model, operating in health care with three huge segments. Its pharmaceuticals, medical devices and consumer products businesses are all highly profitable and generate billions in sales each year. J&J is a highly recession-resistant business, with growth potential thanks to the aging U.S. population.
In 2016, J&J grew earnings per share by 9%. The company posted growth across its three major segments. Pharmaceuticals were the best performer, with 12% revenue growth, followed by medical devices and consumer products, which each grew 4% for the year.
2016 was a challenging year for Big Pharma, under the weight of a strong U.S. dollar, weak economic growth and political pressure over drug pricing. And yet, J&J continues to generate reliable growth, year after year.
J&J has plenty of growth potential moving forward, particularly in pharmaceuticals. Its oncology and immunology segments are particularly attractive, as these two areas contributed revenue growth of 24% and 15%, respectively, in 2016. J&J has multiple potential blockbusters in its pipeline, including Stelara and Imbruvica.
Its pharmaceutical business stands to grow even more because of its $30 billion acquisition of Actelion, a pharmaceutical research and development company. Actelion’s specialty is pulmonary arterial hypertension, which will broaden J&J’s research base in an area with significant untapped potential. J&J expects the acquisition will increase its long-term revenue growth rate by at least 1% per year, plus additional earnings growth through cost savings.
With such strong cash flow, J&J has increased its dividend for 55 years in a row. The stock offers a market-beating dividend yield of 2.6%.
Dividend Kings: Procter & Gamble (NYSE: PG)
Consumer products giant P&G is a titan of industry. It has dozens of brands that each collect more than $1 billion in sales each year. Among its key brands are Pampers, Tide, Charmin, Bounty, Febreze, Crest, Gillette, Old Spice, Pantene and Head & Shoulders.
In all, P&G generates more than $65 billion in annual sales. Going forward, there is plenty of growth potential left for P&G, thanks in large part to its massive portfolio restructuring. P&G has sold off dozens of low-growth brands, such as Duracell and several beauty brands. This has streamlined P&G’s product portfolio, and given it a clear path to return to growth.
Throughout its transformation, P&G has taken more than $10 billion out of its cost structure. The company is also using a significant amount of the proceeds from its asset sales to buy back stock. P&G expects to buy back as much as $15 billion of its shares this year. As a result, earnings growth is improving. P&G earnings rose by 15% last quarter, in constant currencies. Earnings are up in double-digits over the first three quarters of its fiscal year.
P&G has increased its dividend for 61 years in a row. It has a hefty 3.2% dividend yield.
Dividend Kings: 3M (NYSE: MMM)
Last but not least is 3M, whose dividend track record makes it the king of the industrial sector. 3M has distributed uninterrupted dividends for more than 100 years. Moreover, it has increased its dividend for 59 years in a row. The stock offers an attractive dividend yield of 2.3%.
3M generated more than $30 billion of revenue in 2016. It is a diversified industrial giant. Its operating segments include Industrial, Safety & Graphics, Healthcare, Electronics & Energy, and Consumer. Last year, it generated a very healthy return on capital of over 20%.
It is off to an equally impressive start to 2017. The company had a classic “beat-and-raise” first-quarter performance. That means it not only beat analyst expectations for the quarter, but it also raised guidance for the remainder of the year.
3M’s organic revenue increased in every business segment last quarter, with safety and graphics leading the way with 12% growth. The industrial segment reported 6% growth. Overall revenue growth was 5%. That reflects increases in every major geographic area.
Going forward, 3M expects 2% to 5% organic revenue growth this year, which will be more than enough to continue raising its dividend. That makes 3M a top pick for income investors.