Those looking to retire in style have long since abandoned the mattress filled with cash in favor of the only method that is sure to create long-term wealth: investing in proven dividend payers and holding them for the long term. That's a great start, but to ensure that the funds will last a lifetime, a portfolio needs to be stocked with stable companies that also have the potential for future gains.
Unfortunately, finding stocks that meet all of those criteria can be like finding a needle in a haystack.
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To help simplify the task, we asked three Fool.com contributors to choose solid income payers that would help fund your golden years. Read on to find out why they chose Apple (NASDAQ: AAPL), Disney (NYSE: DIS), and Target (NYSE: TGT).
Don't overlook this tech titan
Chris Neiger (Apple): It wasn't all that long ago that Apple may not have been on many dividend investors' radar, but the company's moves over the past few years have made this tech giant a perfect retirement investment.
For instance, the company recently reported its third-quarter fiscal 2018 results, in which sales popped 17% year over year (the company's fourth consecutive quarter of double-digit revenue growth) and earnings soared 40% higher than the year-ago quarter. Growth like this can be hard to come by, particularly when it's coming from a company with a market cap surpassing $1 trillion. But the company's consistent growth isn't the only thing investors should consider.
Apple has been financially dependent on its iPhone sales for years now -- it earns about 56% of its top line from the device -- and even though the business is humming along nicely, Apple is wisely expanding its revenue in other areas as well. Most notably, Apple's Services segment (which is comprised of things like Apple Music, the App Store, Apple Pay, etc.) is a rising star within the company's business. Services sales were up by 31% in the most recent quarter, to $9.5 billion, and they now represent 18% of the company's top line. This growth shows that Apple not only knows how to sell devices to its customers, but it can also convince them to spend more money in the company's ecosystem through its ever-increasing list of services.
The company's dividend yield is at about 1.4% right now, and dividend investors should consider that Apple has a very low payout ratio of about 24%, which means the company has plenty of room to grow that yield in the near future. And if there's any doubt as to how committed Apple is to its shareholders, just remember that the company announced a $100 billion share repurchase program in the second quarter of 2018.
Investors looking for a financially healthy company that's growing quickly, has plenty of room for more dividend increases, and is a leader in its industry would be wise to put Apple on their short list.
Adapting to a changing media landscape
Danny Vena (Disney): One of the keys for a successful retirement stock is identifying a company with the ability to evolve with the changing tides of technology and consumer behavior. Over the last couple of years, The House of Mouse has rocked the existing media paradigm to its core with a number of separate but interconnected announcements that show the company's ability to change with the times.
In late 2017, Disney announced that it would end the distribution deal it penned with Netflix in 2012. The agreement began with Disney's 2016 slate of movies and included major motion pictures produced through the end of 2018. In conjunction with that announcement, Disney said it would launch its own direct-to-consumer offering in late 2019, as well as a companion streaming service for its ESPN sports network.
The biggest revelation came in late 2017, when Disney said it would buy certain assets of Twenty-First Century Fox, which would achieve a number of objectives for Disney. In addition to giving the company a television and cable presence in a number of important international markets, it also provided the company with a controlling interest in Hulu and a massive library of content to feed its upcoming streaming services.
The Disney-branded service will be populated with the company's treasure trove of movies from its Marvel, Pixar, Lucasfilm, and Disney studios, as well as new content currently in development. Add decades of programming from its ABC and Disney cable networks give the company a significant foothold in the streaming industry, providing an ongoing new revenue stream.
Disney's modest dividend currently yields 1.5%, but the company only uses 20% of its profits to fund the payout, which has more than doubled over the past five years. The company has been making payments for more than a quarter of a century, providing investors with assurances that Disney will be around for the long haul.
The company's ability to evolve with the changing media landscape and its ability to fund dividend increases far into the future make Disney the perfect dividend stock for retirement.
A resilient Dividend Aristocrat
Leo Sun (Target): Target is often considered a slow-growth retailer, but its low valuation, high yield, and status as a Dividend Aristocrat make it an ideal retirement stock. Target currently trades at about 15 times forward earnings, pays a 3.3% forward yield, and has hiked that dividend annually for five straight decades.
As for the stock, it's risen more than 250% over the past 20 years, compared to the S&P 500's 160% rally. Like many mature companies, Target uses a combination of buybacks and dividends to boost shareholder value. Over the past 12 months, it spent 41% of its FCF on dividends and 52% on buybacks.
Some bears claim that Target could eventually be crushed between Walmart and Amazon, especially following the latter's takeover of Whole Foods. However, the bears often overlook several key ways Target can counter those two rivals.
First, Target generally focuses on a different demographic of younger, hipper shoppers than Walmart. Second, Target can leverage its long-term leases to prevent Amazon from opening nearby Whole Foods stores or placing lockers near its stores. Lastly, Target is expanding its own digital, delivery, and cloud ecosystems to widen its moat against Walmart and Amazon.
These efforts could be bumpy, but analysts still expect Target's sales and earnings to rise 3% and 12%, respectively, this year. That steady growth rate indicates that Target's core business, which consists of over 1,800 stores, should stay resilient for decades to come.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. Danny Vena owns shares of Amazon, Apple, Netflix, and Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. Leo Sun owns shares of Amazon, Apple, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Walt Disney. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.