Create Your Own Mini-Paycheck With These 5 Stocks

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Retirement income comes from three places -- good ol' Uncle Sam, one's hard-earned savings, and pension plans. But let's face it...the future looks bleak for Social Security and the days of pension plans are fast dwindling. So what's a Foolish investor to do?

Swelling liabilities and expanding lifespans
In 1950, many folks retired with a congratulatory pat on the back, a gold watch, and a guaranteed monthly paycheck. Those days are over for most folks, though, as unfunded pension liabilities are mounting. The nation's largest pension fund, $230 billion California Public Employees' Retirement System (CalPERS), is one such example. A major reason for bloated pension liabilities: People are living longer.

According to the CDC, in 1950 the average male was expected to live to age 65. By 2007, that figure had jumped to age 75. In 2020, life expectancy is projected to be more than 77 years for males and almost 82 years for females. With several decades in retirement, inflation is an investor's worst enemy.


Dividends are important for beating inflation because they allow investors to pay for bread, milk, and gas at future prices (and who knows what those will be). Looking at the S&P 500 index over the past 70 years, dividends grew about 6% annually while inflation rose by 4%.

You can outpace inflation by buying rock-solid companies that pay great dividends. I've compiled a list of some of my favorites based on the following criteria:

  • Attractive industries. Potential rivals have a tough time breaking into these companies' lines of work, and tough economic times won't necessarily keep stocks like these from thriving.
  • Strong competitive positions. Brand dominance or special niches help these tenacious companies sustain long-term profitability.
  • Tenured management teams. Good management teams at the helms of these companies act in the best interest of shareholders.
  • Solid financial positions. These companies are characterized by robust balance sheets and impressive cash flows.
  • Dividend payers. Companies like these pay excellent dividends and have increased them for years.

Five income-generating stocks that fit these criteria to a T are listed in the chart below. All five companies boast at least A-rated debt.

Company

Dividend Yield

Dividend Paid Since

Number of Years of Consecutive Dividend Increase

Quick Reason

Johnson & Johnson

(NYS: JNJ)

3.5%194449Products so ubiquitous that Tylenol, Band-Aid, and Visine are commonly used to refer to generic counterparts. Valuable and promising pipeline. One of few companies with debt rated AAA by both Moody's and Standard & Poor's.

Procter & Gamble

(NYS: PG)

3.1%189055Unparalleled portfolio of more than 250 brands. Vigorous innovation pipeline. Nearly two dozen brands generate sales in excess of $1 billion; around 20 more generate sales between $500 million and $1 billion.

3M

(NYS: MMM)

2.6%191654More than 60,000 products including Scotch Tape and Post-it notes. Strong R&D program. Manufactures chemical abrasives that help extract crude oil from the Canadian oil sands.

NextEra Energy

(NYS: NEE)

4.0%194416Industry leader in the use of alternative energy. Largest generator of wind power in the country. Industry leader in solar power.

Chevron

(NYS: CVX)

2.9%191224Industry leader in profits, cash flow per barrel produced, and return on capital employed. Promising new projects in liquefied natural gas in Australia and the Gulf of Mexico.

Source: The Motley Fool, Yahoo! Finance, companies' 2011 annual reports.

Companies can increase, decrease, or suspend their dividends at any time. However, each of these companies has been paying a dividend since at least the second Roosevelt administration.

Need more invitation to ponder dividend-paying stocks? Consider this. During our most recent lost decade, the median return on stocks with a market cap above $1 billion was a whopping 3.2% loss. But in that group, stocks that paid at least a 3% dividend yield saw a 28% median return. Dividends act as shock absorbers for your portfolio in flat markets. And I'm always a fan of helping fellow Fools create a little more income.

You'll find additional great ideas for dependable, income-generating investments in a free report crafted by my Foolish cohorts: Secure Your Future With 9 Rock-Solid Dividend Stocks.

At the time this article was published Fool contributorNicole Seghettilikes helping people make more money. She owns shares of Johnson & Johnson, Procter & Gamble, 3M, and NextEra Energy.The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Procter & Gamble, Johnson & Johnson, 3M, and Chevron, as well as creating diagonal call positions in 3M and Johnson & Johnson.  The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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