Many investors often break their portfolio into separate baskets, such as core holdings versus non-core holdings. Core holdings, including dividend stocks, are often considered to be the best available companies to own as their competitive advantages have set them apart from their peers. These are the stocks investors plan to hold forever.
These types of companies often have very long histories of dividend growth as well, some of which have achieved dividend aristocrat status as they have increased their dividend for at least 25 consecutive years.
This article will examine three names that we believe should be considered as foundation pieces for an investor’s retirement portfolio, including:
These companies have an average dividend growth streak of almost 56 years and competitive advantages that should allow them to grow their payments to shareholders for years to come, making them core holdings in our view.
Retirement Dividend Stocks: 3M Company (MMM)
In the nearly 120 years that the company has been in business, 3M has gone from a small mining venture to a leading industrial conglomerate. The company has four business segments, including safety and industrial, healthcare, consumer, and transportation and electronics. 3M has a market capitalization of $113 billion and generated revenue of nearly $35 billion over the last year.
3M’s primary competitive advantage is the reach of its product portfolio, which allows it to sell items to a wide variety of purposes. The company’s products are used in office buildings, industrial facilities, hospitals, schools and homes.
3M is able to appeal to a wide range of customers because of its massive patent collection. To date, the company has more than 100,000 patents, which keeps a lid on competition in a number of areas. In an effort to bolster this portfolio, the company spends approximately 6% of sales on research and development every year, including $1.9 billion in 2020.
This investment doesn’t go to waste as it adds to the patent portfolio and shows up in results. Approximately one-third of annual sales come from products that didn’t exist last year. This how an “old world” industrial company can stay ahead of the competition by finding new sources of revenue.
This business model has also enabled 3M to grow its dividend for multiple decades. In fact, 3M’s dividend growth streak stands at 63 consecutive years, one of the longest in the marketplace.
3M is not just a dividend aristocrat; it is also a dividend king.
The company’s dividend has a compound annual growth rate of just over 10% over the last decade, but that has slowed considerably during the recent years, including a 0.7% and a 2% increase over the past two years, respectively.
However, the yield and payout ratio are very attractive. Currently, shares yield 3%, more than double that of the average yield of 1.3% for the S&P 500 and higher than 3M’s average yield of 2.7% since 2011. Using the annualized dividend of $5.92 and our expectation for $9.90 of earnings-per-share for 2021, 3M has a projected payout ratio of 60%, just above the five-year average payout ratio of 58%.
Johnson & Johnson (JNJ)
Johnson & Johnson is arguably the world’s foremost leading healthcare company. The 130-year-old company sells pharmaceuticals, medical devices and consumer products around the world. Johnson & Johnson is valued at $468 billion and has produced revenue of $89 billion over the last four quarters.
The company has a very diversified business and has a hand in nearly every aspect of healthcare. Whereas most companies in this sector tend to focus on one area, such as drugs or devices, Johnson & Johnson covers nearly every aspect of healthcare. This gives Johnson & Johnson a reach that few other names in the space can match.
The diversified business model also gives Johnson & Johnson some protection if one segment has considerable weakness. Last year, for example, the medical device segment was severely impacted by the postponement of elective surgeries due to the novel coronavirus pandemic. The strength of the other segments more than offset this decline and revenues were actually up year-over-year.
Like 3M, Johnson & Johnson supplements its existing product portfolio by spending heavily on research and development, including more than $12 billion last year and more than $50 billion over the past five years.
Johnson & Johnson has a storied dividend growth streak of its own, as the company has raised its distributions to shareholders for 59 consecutive years. The dividend has compound at a rate of 6% since 2011, with the most recent raise coming in at 5% for the June 8,2021, payment date.
Shares of Johnson & Johnson yield 2.4% at the moment, which is below the stock’s 10-year average yield of 2.9%. The annualized dividend of $4.24 is projected to consume just 44% of our expected earnings-per-share of $9.55 for 2021, which compares favorably to the 10-year average payout ratio of 48%.
Retirement Dividend Stocks: McDonald’s (MCD)
McDonald’s, in business since 1940, has grown into a global foodservice retailer powerhouse. The company has more than 39,000 locations around the world. McDonald’s generated revenue of almost $22 billion over the last 12 months and has a market capitalization of $179 billion.
McDonald’s has made changes to its business model over the past few years, including the refranchising of the majority of its restaurants. More than 90% of locations have been refranchised and 93% of revenues come from franchise fees. This makes it appear as if McDonald’s revenue has declined over the last decade, but this has allowed the company to operate a more asset-lite model.
The company also has brought innovation to its menu, including the addition of All Day Breakfast, that had a significantly impact on business results. Additionally, McDonald’s offers consumers good value, an attractive trait in periods of economic expansion as well as contraction. Consumers often reduce their spending in a recession, but they still enjoy eating out so more inexpensive dining options become even more attractive.
Lastly, McDonald’s has embraced different ways consumers can enjoy their offerings. Included in this is the company’s investment in digital, which provided $8 billion in systemwide sales in the first half of 2021 in just six markets. This was a 70% increase from the prior year. The company also has more than 22 million active MyMcDonald’s user in the U.S., with plans to expand its new loyalty program to several other top markets by the end of next year. The company has also made it easier to get food by partnering with delivery services, which has expanded McDonald’s reach.
Given the strength of its business, it isn’t surprising that McDonald’s is a dividend aristocrat. At 45 years, the company’s dividend growth streak is the youngest of the names discussed here, but still impressive in its own right. The dividend had a compound annual growth rate of 7.1% from 2011 to 2020 and gave shareholders a 3.2% increase late last year.
Shares of McDonald’s yields 2.2% compared to the decade-long average yield of 2.9%, so the stock isn’t yielding as much as it has over the long term. McDonald’s has an annualized dividend of $5.16. With expected earnings-per-share of $8.70 for the year, the projected payout ratio is 59%, slightly below the 10-year average payout ratio of 61%.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.