The right dividend security can be a fantastic addition to your retirement fund. Stable companies with high dividend yields will meet investment income requirements while still giving you a good night’s rest. These are two of the most important conditions for retiree investment portfolios.
Remember, these are not risky, high-end growth stocks that periodically experience sharp declines. These stocks are buzzing, slowly and steadily, kicking off valuable cash distributions to shareholders each quarter.
Illinois Tool Works
Illinois Tool Works (NYSE: ITW) is a large industrial enterprise with diverse operations in seven different segments. It produces commercial devices, automotive components, construction equipment, chemicals, food equipment and electronic measuring devices. This Fortune 200 and Dividend Aristocrat member is a leader in a broad product portfolio, creating a broad economic divide with scale and brand strength. That kind of resilience and consistency is a good start.
Illinois Tool Works had a difficult 2020 as revenue fell 10% from 2019. Results were more encouraging in the second half of the year with a return to positive growth. Management anticipates a rebound year in 2021. They call for double-digit growth in revenue and earnings per share (EPS) as well as an increase in profit margin. Importantly, they also expect free cash flow to exceed earnings, so that accounting earnings turn into cash that can be returned to shareholders. After having weathered the storm, the blue sky awaits us.
Despite these operational challenges, ITW actually increased its quarterly dividend last year from $ 1.07 to $ 1.14 per share. This is why retirees love dividend aristocrats so much; they tend to deliver good news when everything else crumbles. ITW currently pays a forward dividend yield of almost 2% with a payout ratio of 67%. Given the good outlook and the economic moat of the company, investors should expect quarterly distributions to continue to increase in the future.
MPLX (NYSE: MPLX) is a Master Limited Partnership (MLP) that was formed to own and operate Petroleum Marathon (NYSE: MPC) intermediate assets. These assets include transportation and storage equipment, such as pipelines, terminals, reservoirs and collection systems. In general, intermediary firms are less influenced by market prices for crude oil and refined products than other parts of the energy sector.
MPLX reported a 6.4% drop in operating revenues for the full year 2020, attributable to lower volumes of crude oil and natural gas transported. Energy exploration and production companies took their capacity offline to reduce volume when oil prices fell last year. The MLP has also been working to bring capital spending under control and divest itself of some assets that were not generating strong returns on investment. The energy sector as a whole looks more stable going forward, and a return to travel this summer could prompt production volumes to restart. This would further consolidate the operations of transport and storage companies midway.
Even with the disruptions of last year, MPLX was able to maintain its quarterly dividend. The company’s distribution coverage ratio was comfortable at 1.58 in the fourth quarter of 2020, indicating that MPLX is producing more than enough cash to support its dividend. The MLP also reduced debt to income, further illustrating its focus on financial health. Retirees should prioritize financially sound actions to reduce risk.
This is a great opportunity for investors to acquire sustainable cash flow at a discount. The dividend yield of 10% of the stock is unusually high, implying that the market expects the payout to be reduced. If the worst of our economic turmoil is behind us, then it’s hard to imagine that MPLX will see its dividend drastically reduced. Even if it were halved, the return would still be well above average at 5%. This MLP produces too much income for retirees to ignore.
Snap-on (NYSE: SNA) designs and sells tools and storage, software and other equipment. The company sells primarily to auto mechanics, but it also targets aerospace, agriculture, construction and defense customers. Snap-on sells directly to end users through 4,800 physical stores and an online channel. It also operates a franchise network of mobile vending trucks and operates a finance business that provides loans to large buyers.
Snap-on was not spared from last year’s pandemic disruption, with sales falling 3.7%. However, things recovered with 20% year-over-year revenue growth in the first quarter of this year. Certainly better results can be expected based on the complete trade halt last March, but this latest news is still very encouraging.
Stability is the real value that Snap-on delivers to shareholders. The stock has paid back-to-back quarterly dividends in every period since 1939, which should be of interest to retirees. Snap-on’s quarterly dividend of $ 1.23 per share currently translates into a 2% dividend yield. This quarterly distribution grew rapidly by $ 0.71 per share in 2017, which is a bullish signal. A low payout ratio of 37% shows the company is pulling more cash than enough to maintain the current dividend – and maybe even increase it from here.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.