One thing you can’t ignore while picking a dividend stock for your retirement income portfolio is the company’s ability to keep paying you, no matter how bad or well the economy is doing.
If a dividend stock has a history of paying dividends consistently then you have a money-making machine at your disposal that you can use to multiply your wealth through compounding and dividend reinvestment.
We have picked two top dividend stocks to explain this phenomenon and help you build your cash-generating portfolio over time.
Microsoft Has The Power To Defend Its Business
Many investors mistake Microsoft (NASDAQ:MSFT) for a pure technology stock in a great growth mode, which could be picked for quick gains. But in our view, Microsoft is a great income stock that you should buy to hold over the long run.
No doubt the company has rewarded its investors handsomely over the past five years, with shares up about 180%, as it benefited from a surge in technology investments, its foray into cloud computing and the strength of its core Office products. But if you analyze Microsoft more deeply, you will realize it’s a great cash cow business, with a durable advantage over its competitors.
The company has an 82% share of the desktop operating system market, generating massive amounts of recurring cash for this company. Office, which is now a subscription-based service for Microsoft’s millions of home and corporate users, continues to be a powerful driver of earnings. In the last fiscal year, these two units drove more than half of Microsoft's total sales.
If you are an income investor, you need to find companies like Microsoft to stash in your portfolio. These are the giants that have the power to defend their businesses and pay you for the rest of your life.
Microsoft has an excellent track record when it comes to rewarding investors. Since 2004, when it first began paying a dividend, the company’s payout has swelled nearly five times. Dividend growth has been supported by a low payout ratio and strong underlying businesses.
With an annual dividend yield of 1.7%, Microsoft pays a quarterly dividend of $0.46 per share. That yield may look small to many investors, but don’t forget that Microsoft is still growing, while offering great upside potential, too. Including dividend payments, Microsoft has delivered 217% in total returns over the past five years.
P&G Is Great At Being Boring
Most investors focus on high-flying stocks that have produced remarkable returns over the past decades. But what about the maker of Crest toothpaste, Tide laundry detergent and Bounty paper towels?
Procter & Gamble (NYSE:PG) is one of those boring stocks that hardly get press or bragged about at dinner parties. But just like Microsoft, P&G has established dominant market positions.
The world’s largest consumer product company is one of the largest dividend payers in the sector. The maker of Dawn dish soap and Pampers has hiked its dividend for 62 consecutive years. Over the past 128 years it has never stopped paying dividends, making money during recessions, wars and droughts.
With a current dividend yield of 2.87%, P&G stock pays about $0.72 a share each quarter. This remarkable history of payouts makes this consumer stock a dependable player if you are looking to earn income the rest of your life.
Another benefit of owning P&G is that in times of extreme volatility, when highly cyclical growth stocks suffer the most, slow-moving consumer staples stocks outperform. Since October, when markets suffered periods of extreme volatility, P&G stock has outperformed by a big margin, rising more than 20% when S&P 500 is up just slightly.
Bottom Line
Microsoft and P&G are the type of stocks that you can rely on for consistently growing income. The only secret of this income-generating strategy is that you buy stocks with a wide moat, a term coined by Warren Buffett to define companies with a durable competitive advantage, recurring cash flows and a history of rewarding their investors. If you buy and then hold these stocks, you can expect to get paid.