The ideal dividend stock for retirees has a high yield, a stable business, and the potential for meaningful long-term earnings and dividend growth. Scotts Miracle-Gro (NYSE: SMG), International Business Machines (NYSE: IBM), and AT&T (NYSE: T) check all the boxes. Here's why retirees should consider these three dividend stocks.
Short-term headwinds are driving this yield higher
Maxx Chatsko (Scotts Miracle-Gro): There's a silver lining to the 30% year-to-date drop experienced by shares of Scotts Miracle-Gro: The dividend yield is now hovering near 3%. Even better, the stock's downright disastrous performance is due almost entirely to short-term headwinds. In other words, the concerns of Wall Street should not be shared by long-term investors.
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The stock has been walloped this year by factors mostly out of management's control. A stubborn winter that didn't want to hand over the reins to spring postponed the start of the consumer lawn and garden season in the United States, which delayed sales for the company's largest and most profitable segment. Meanwhile, the company's fastest-growing segment, the hydroponics business called Hawthorne, has encountered several setbacks in the pace of marijuana legalization.
While both sources of uncertainty have stung the business in 2018, management cannot control the weather or political gridlock. But the headwinds aren't changing the fact that Scotts Miracle-Gro is a profitable and healthy business in good times and bad. Moreover, investors should be encouraged by what management is doing when it comes to the things it can control.
Scotts Miracle-Gro is investing to bolster its leading North American consumer lawn and garden brands, and expand into high-margin, high-growth opportunities represented by organic and craft brands. It's also strategically adding businesses and products to Hawthorne, which will enable the segment's long-term success. Taking those factors together, the future is bright. And with the dividend yield now sitting at 3% and long-term profit growth all but secured, this is a great time to add the stock to your portfolio.
A century of dividends
Tim Green (International Business Machines): IBM has been around for over a century. It's paid a quarterly dividend without fail since 1916, through the Great Depression, the Great Recession, and everything in between. IBM has raised its dividend annually for the past 23 years, a record that puts it within spitting distance of Dividend Aristocrat status. In terms of dividend track record, IBM is about as good as it gets.
Although revenue and profits have slumped over the past five years as the company has invested heavily in areas like cloud computing, analytics, and artificial intelligence, IBM's competitive advantages have allowed it to remain a cash flow machine. IBM expects to produce around $12 billion of free cash flow this year, with the dividend eating up less than half that total.
Those competitive advantages include decades-long relationships with customers, an entrenched status in industries like banking, and a broad set of technologies that allows the company to sign massive, far-reaching deals. These advantages don't guarantee that IBM will be successful in the long run, but they do give the company a wide berth to adapt to a changing tech industry.
IBM's dividend currently yields about 4.3%, and the stock trades for barely more than 10 times adjusted earnings guidance for 2018. Retiree or not, if you want a reliable dividend and a chance at significant capital gains, IBM is a great choice.
An underappreciated dividend
Travis Hoium (AT&T): When looking for dividends, retirees should be looking for stable businesses that will generate cash for years to come. What business today is more stable than telecommunications like cellular services and broadband?
Wireless and internet connections are now indispensable for most people in the U.S., and AT&T is one of only four major networks to serve most of the country (along with Verizon, T-Mobile, and Sprint). This oligopoly has the effect of reducing price competition, which drives strong profitability. The capital-intensive nature of telecommunications also makes it hard for new companies to enter the market. Add it up, and AT&T has a solid competitive moat.
AT&T isn't done growing, either. In the second quarter of 2018, it added 499,000 phone, 80,000 video, and 23,000 broadband subscribers. Changes in accounting rules meant revenue fell from $39.8 billion a year ago to $39.0 billion, but cash from operations jumped $1.5 billion to $10.2 billion and earnings were up from $0.63 a year ago to $0.81 per share. That's more than enough to sustain a $0.50-per-share quarterly dividend.
What I like about AT&T long term is that it's adapting well to market realities in its end markets. It's no longer enough to be just a wireless company -- more services need to be bundled together. AT&T added DIRECTV on the video side, and recently acquired Time Warner to increase content assets. These assets give the company a path to a wireless streaming future, which is where the market is going. That bodes well for the future of this already strong dividend stock.
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Maxx Chatsko has no position in any of the stocks mentioned. Timothy Green owns shares of AT&T and IBM. Travis Hoium owns shares of AT&T and VZ. The Motley Fool recommends TMUS and VZ. The Motley Fool has a disclosure policy.