2 Big Dividends to Drive Your Retirement Portfolio
Last summer, I pledged to put at least $4,000 of my own money behind 10 stocks. My goal was to build the World's Greatest Retirement Portfolio.
So far, the results have been outstanding. The $40,000 invested has returned $8,160 -- while an investment in the S&P 500 would have returned only $1,040 -- an outperformance of about 18 percentage points!
Though I focused a great deal on companies that were proven innovators, I understood the need for diversification. That's why Coke (NYS: KO) and Johnson & Johnson (NYS: JNJ) earned spots at the table -- they are industry stalwarts that provide stability and income. Though they may not be rocket stocks, they'll keep a retirement portfolio steady during tough times.
Below, I'll explain the two key reasons why these companies will remain in my portfolio. At the end, I'll offer you access to a special free report on nine more rock-solid dividends to secure your future.
The world's most valuable brand
When you want to establish a rock-solid cornerstone to your investments, it doesn't hurt to have the world's No. 1 brand. Such is the case with Coke, according to Interbrand. That type of strength has helped the company to dominate domestically and abroad.
The past year has surely been a good one for Coke's stock, as it has outperformed the S&P 500 -- including dividends -- by 12 percentage points since I originally recommended it. Though I'm certainly grateful for the company's price appreciation, it's the health of its dividend that I really want to keep an eye on -- especially in comparison to industry competition Pepsi (NYS: PEP) and Dr Pepper Snapple.
Below you'll see that Coke's dividend is both significant, and safe.
Company | Yield | Payout From Earnings | Payout From FCF | 5-Yr. Dividend Growth Rate |
|---|---|---|---|---|
Coke | 2.7% | 51% | 49% | 8.6% |
Pepsi | 3.1% | 51% | 69% | 11.6% |
Dr Pepper | 3.3% | 48% | 153% | N/A |
Source: Yahoo! Finance, payout from FCF is for trailing 12 months, dividendinvestor.com, N/A = Not available, as dividend has not been paid out for at least five years.
While it may look at first blush like either Pepsi or Dr Pepper are better dividend investments, the story changes once we dig a little deeper. Sure, both companies have a higher payout ratio than Coke, but that's due in part to the fact that investors are willing to pay a higher premium for Coke's stock.
Furthermore, when we look at free cash flow -- which is the true measure of how much money a company is bringing in over the course of a year -- we see that Coke's dividend is by far the safest of the three. The company only uses about half of the money it brings in to pay out dividends -- which means there's still a lot of room to grow the dividend in coming years.
A medical juggernaut
Though this year admittedly hasn't been the greatest for Johnson & Johnson, my money is still behind this medical conglomerate. Yes, there have been problems with hip implant recalls and accusations of wrongdoing on behalf of CEO Alex Gorsky.
But as I wrote in my original recommendation, there's no company out there that can offer the same type of exposure to the medical field. The company has divisions focused on the consumer (Tylenol), pharmaceutical (prescription drugs), and medical devices (implants) fields. And as you'll see below, its dividend is both significant and safe when compared to other industry players like Abbott Labs (NYS: ABT) and Stryker (NYS: SYK) .
Company | Yield | Payout From Earnings | Payout From FCF | 5-Yr. Dividend Growth Rate |
|---|---|---|---|---|
J&J | 3.9% | 62% | 53% | 8.5% |
Abbott | 3.3% | 59% | 39% | 10% |
Stryker | 1.6% | 22% | 28% | 31% |
Source: Yahoo! Finance, payout from FCF is for trailing 12 months, dividendinvestor.com
As it is, Stryker's dividend is a little too small to whet my dividend appetite right now. And while there's no doubt that Abbott is a strong candidate for my portfolio, I'm still encouraged by the broad diversity that Johnson & Johnson offers -- even though it's dividend isn't quite as appealing as Abbott's. In truth, you couldn't go wrong with either one of these medical stalwarts.
Dividends, dividends, everywhere!
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At the time thisarticle was published Fool contributorBrian Stoffelowns shares of Coke and Johnson & Johnson. You can follow him on Twitter, where he goes byTMFStoffel.The Motley Fool owns shares of Johnson & Johnson, PepsiCo, Coca-Cola, and Abbott Laboratories.Motley Fool newsletter serviceshave recommended buying shares of Stryker, Johnson & Johnson, PepsiCo, and Coca-Cola, as well as creating diagonal call positions in PepsiCo 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.
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