Top 3 Dividend Stocks to Consider for Your Retirement Portfolio

Best Dividend Stocks to Watch for RetirementSince the Great Recession, it’s been a great time to borrow but a terrible time for those saving for retirement. With interest rates near zero, the Federal Reserve has effectively taken the “income” out of “income investing.” Even when interest rates do start to rise, it will be a long, slow trajectory.

The financial crisis has changed the way we plan and invest for retirement. Those near or entering retirement probably had a solid portion of their retirement portfolio allocated to interest-bearing investment. The ultra-low interest rate environment has not helped.

Those with some risk tolerance could embrace decent stocks that paid high dividends. Those who are risk-averse could play it safe and invest in blue chip stocks that provided reliable, long-term capital appreciation and a solid annual dividend.

But after six years, the bull market is starting to look a little old. Sure, the S&P 500 is up more than 140% since bottoming in March 2009. But it’s up just one percent in 2015. It might be time for investors to re-evaluate their retirement portfolio.

According to the CAPE PE ratio, the S&P 500 is overvalued by around 63%. The last times the ratio was this high were in 1929 and 1999. According to the Market Cap to GDP Ratio of 124%; a reading of 100% indicated stocks are properly valued. The ratio has only been higher once since 1950—that was in 1999.  

Of course, this does not mean that every stock is overvalued. But it does mean you have to choose what stocks you want to invest in more carefully. In addition to looking for stocks you think are fairly or undervalued, with the markets trading in a tight range near record highs, you may want to keep an eye out for bigger stocks that are better prepared to respond to any cycles the markets might go through.

On top of that, it’s important to look for stocks that provide capital appreciation and solid dividends. You’ll also want to look for companies that have a long history of consistently increasing their annual dividend payout. Not only does this help offset inflation, it can also help you weather the ups and downs that the share price will go through.

The S&P 500 may be overvalued but these three dividend stocks still have great long-term growth potential.

3 Dividend Stocks to Consider for Your Retirement Portfolio

Johnson & Johnson (NYSE:JNJ)

Investing for retirement shouldn’t be complicated, confusing, or require a translator if you’re talking to a financial planner. Johnson & Johnson (NYSE:JNJ) is a great retirement stock because it’s an excellent company that provides investors with capital appreciation and consistently increases its annual dividend.

Johnson & Johnson currently provides an annual dividend of three percent or $3.00 per share. Best of all, Johnson & Johnson has raised its annual dividend for the last 53 consecutive years.

Since the markets bottomed in March 2009, Johnson & Johnson’s share price has soared 170%—significantly outpacing the S&P 500 and even the Dow Jones Industrial Average.

Between 2009 and 2014, the company’s annual dividend payout climbed 43% from $1.93 to $2.95. In 2015, it looks like the company’s annual dividend will reach $2.95, a 52% increase over 2009.

Admittedly, with the markets overvalued, Johnson & Johnson’s share price will most likely not experience short-term gains like it’s had between 2009 and 2014. That said; the company provides products people around the world use every day. It also boasts an exceptional track record of growth: 31 consecutive years of adjusted earnings increases and 53 consecutive years of dividend increases. Over the last 10 years, Johnson & Johnson stock generated an 8.3% total return for investors compared to a 7.7% total return for the S&P 500. (Source: JNJ.com, August 11, 2015.)

While the company’s share price is down 3.5% year-to-date, it is currently trading near a well-tested support level of $100.00.

Pepsico, Inc. (NYSE:PEP)

When it comes to investing for retirement, it’s good to look at big companies with great international brand recognition and loyalty. Pepsico, Inc. (NYSE:PEP) is a beverage company known for more than the eponymous Pepsi. Some of Pepsico’s 22 billion-dollar brands include “Lay’s,” “Mountain Dew,” “Gatorade,” “Doritos,” “Quaker Oats,” “Tostitos,” “Aquafina,” and “Litpon.” (Source: Pepsico.com, August 11, 2015.)

The company has a market cap of $145 billion and forward P/E of 20.0. It also provides an annual dividend of 2.8% or $2.80 per share. Another reason to like Pepsico is that it has raised its annual dividend for the last 43 consecutive years. Unlike the broader markets, Pepsico is outperforming the S&P 500; up 5.2% year-to-date.

In July, the company reported solid second-quarter results, with earnings up slightly at $1.98 billion or $1.32 per share from $1.97 billion, or $1.29 per share, for the second quarter of 2014. Pepsico also raised its full-year earnings per share (EPS) growth target to eight percent from previous guidance of seven percent. (Source: Pepsico.com, August 11, 2015.)

On July 16th, Pepsico’s Board of Directors declared a quarterly dividend of $0.703 per share, a 7.3 % increase versus the comparable year-earlier period. Pepsico has paid consecutive quarterly cash dividends since 1965. (Source: Pepsico.com, August 11, 2015.)

AT&T, Inc. (NYSE:T)

AT&T, Inc. (NYSE:T) is the industry-leading provider of wireline voice communications services in the U.S, plus 11 Latin American countries. The company has a market cap of $213 billion and a forward P/E of 12.73.

Those looking to beef up their retirement portfolio with a high dividend stock might be impressed with the company’s 5.41% annual dividend ($1.88 per share). What’s more, AT&T has raised its annual dividend for 31 consecutive years.

That means, during the Great Recession, while most companies were cutting costs to save money, AT& T continued to reward investors. Since the markets bottomed in 2009, the company’s annual dividend has increased 14% from $1.64 to an expected $1.88 in 2015. Between March 2009 and today, AT&T’s share price has climbed 131%. (Source: ATT.com, August 11, 2015.)

On July 23rd, AT&T announced that it grew second-quarter revenues, expanded margins, and delivered double-digit adjusted earnings per share and cash flow growth. Second-quarter revenue increased 1.4% year-over-year to $33.0 billion as it added more than two million new wireless subscribers. Net income slipped to $3.0 billion while it generated strong cash flows; including $9.2 billion in cash from operations and $4.5 billion in free cash flow. (Source ATT.com, August 11, 2015.)

The FCC also recently approved the company’s $48.5 million acquisition of satellite TV provider DirecTV. As a result, AT&T is now the largest pay TV provider in the U.S. and the world, providing service to more than 26 million customers in the United States and more than 191 million customers in Latin America; including Mexico and the Caribbean. (Source: ATT.com, August 11, 2015.)