Finding decent retirement income for your portfolio isn't an easy task these days. So-called “safe” investment avenues don't pay enough, even after several interest rate hikes in the U.S.
The yield on the 10-year Treasury bond—a benchmark for the most safe assets—hovers around 3%. The return on a bank saving accounts is even more disappointing...close to zilch.
If you’re willing to take a bit more risk in order to build a higher income stream for your golden years, investing in some quality dividend stocks wouldn't be a bad idea. Look for companies that have dominant positions in their industries with solid balance sheets and a history of rewarding investors with steady and regularly increasing dividends. The following two stocks fit this bill perfectly.
1. McDonald’s
Though McDonald's (NYSE:MCD) might have a broad variety of items on their fast food menu that investors may find unhealthy, shares of this global restaurant chain offer a wholesome way to lock in steadily growing dividends. The company has raised its payout each and every year since 1976, when it first started paying dividends.
That's solid proof McDonald's fast food business has the power to satisfy income-hungry investors. No matter the state of the national, or global economy, even during recessions, periods of market turmoil, or shifting consumer food preferences McDonald's continues to reward investors.
McDonald’s also meets the screening criteria I suggested above. The company has a global competitive advantage over rivals, a solid recurring revenue model and a great history of compensating its investors.
Last year the company did $91 billion in system-wide sales, more than double that of its nearest competitor, Kentucky Fried Chicken (NYSE:YUM). According to Forbes, McDonald’s is currently the seventh most valuable brand in the world, valued at $37.4 billion by the publication. At the close of 2017, McDonald’s was running 37,241 restaurants worldwide, including 14,036 in the US and 23,205 globally.
McDonald's earnings momentum doesn’t show any signs of having peaked. In the second quarter of 2018, global comparable sales increased 4% year-over-year. On a constant currency basis, McDonald’s diluted earnings rose 9% year-over-year to $1.90 per share.
It pays quarterly dividends of $1.01 per share. That translates to an annual dividend yield of 2.53% at the current share price. Based on the company’s dividend history, another dividend hike is likely to be announced in the second-half of September. With a low payout ratio of 58.21% there's no risk that McDonald's can't sustain their dividend trajectory going forward.
2. Microsoft
When considering an equity investment, It’s difficult not to take into account tech company shares. Most technology names, however, don’t pay dividends. That's generally because they’re still in growth mode and need to re-inject a lot of their capital into R&D in order to keep driving momentum.
Among the the top tech stocks, Microsoft (NASDAQ:MSFT) is one of the few that can satisfy both growth and income investors. The latter is due to the company's remarkable track record of hefty dividend payouts. Since announcing its first dividend in 2004, Microsoft has grown its quarterly payout by a whopping 425%.
With its dominant market position in the desktop and laptop operating systems, server and cloud computing technologies, Microsoft’s cash-generating machine is still strong. In the fiscal year that ended on June 30, the California-based software and hardware provider's annual sales topped $100 billion for the first time in company’s history, fueled by its internet storage business and Office software. Fourth-quarter profit rose to $8.87 billion, while sales climbed 17% to $30.1 billion, beating analyst forecasts.
Microsoft pays a quarterly dividend of $0.42 per share for an annual dividend yield of 1.55%. Since the company generates strong cash flows, its payout ratio of 77.46% remains in safe territory. That combination provides a strong signal that the company has a lot of runway to continue hiking its dividend.
After its shares have had a remarkable five-year run in which investors made a killing by earning returns of 225%, this may not be the ideal time to buy Microsoft shares. However, given the company's continued leadership position in a variety of areas where there's still a lot of room for expansion, we continue to see this stock as a strong buy for the long-term income investors.
Bottom Line
McDonald’s and Microsoft are the two income stocks that you can safely stash in your retirement portfolio. We believe each is a relatively worry-free way to get steadily growing income. We see both as templates for what income investors should be looking for in other stocks as well, if they wish to add yet more holdings to a retirement portfolio.