Retirees, seeking reliable income from their investment portfolios, have been coping with anemic bond rates amid easy monetary policies and unprecedented support from central banks during the pandemic.
The 10-year U.S. bond yield is hovering around 1.6% these days, up from less than 1% at the start of 2021 and as little at 0.31% during the market turmoil of March 2020. Some of the most aggressive forecasters don’t see rates climbing above 2.5% before the end of this year.
Supporting the consensus that the low-rate environment is unlikely to change anytime soon are governments around the globe that continue to work to infuse life back into their economies after the devastating impact of the COVID-19 pandemic on businesses and personal finances.
In the abysmally low-rate environment, it makes sense for retirees to seek refuge in high-quality dividend stocks that offer payouts that beat other asset classes. Below, we've short-listed two such stocks to help retirees earn higher income:
1. IBM
Many investors don’t have a favorable view on International Business Machines (NYSE:IBM) due to its poor growth performance over the past decade.
The 109-year-old tech giant has been slow to restructure its business, at a time when demand for its big-frame servers and other hardware plunged and its clients began storing data on cloud services provided by rivals like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
But there are some clear signs that the company is succeeding in its turnaround efforts, making its 5% dividend yield attractive for long-term investors. The New York-based IBM this week posted its biggest revenue gain in 11 quarters, fuelled by demand for its cloud services.
Arvind Krishna, who took over as CEO from Ginni Rometty last April, is focusing on artificial intelligence and the cloud to revive growth. Krishna has reorganized the company’s business around a hybrid-cloud strategy, which allows customers to store data in private servers and on multiple public clouds.
Krishna said he is “confident” IBM will deliver revenue growth in the second quarter and the rest of the year. “We will exit 2021 in a stronger position than we started,” he said on a conference call after the results were released.
IBM, in our view, is a safe dividend stock with which to earn higher income, especially after the new management’s clear shift to cloud computing. These steps are encouraging and could unlock the value of IBM stock, which has hiked its dividend for 25 years straight.
Trading at $138.16 as of Tuesday's close, IBM pays a quarterly dividend of $1.63 per share.
2. General Mills
Consumer staples offer another attractive avenue for retirees who want to earn steadily growing dividend income. They're considered safe since these companies are less tied to the economic cycle and tend to sell products that customers need no matter the economic circumstances.
For these reasons, we like General Mills (NYSE:GIS), maker of Cheerios cereals, Yoplait yogurt and Nature Valley granola bars among other food staples, for long-term income portfolios.
With a price of $62.30 as of last night's close, the stock is up about 21% over the past two years, and it’s unlikely to show much volatility even if the market takes another plunge during the pandemic. Another benefit of owning GIS stock is that investors receive a 3.3% yield on the company's dividend, which compares favorably with current, extremely low bond yields. Plus, the Minneapolis-based company has paid uninterrupted dividends for the past 120 years.
To spur growth in recent years, General Mills has tried to diversify its revenue base. In 2018, the company acquired the maker of Blue Buffalo pet food, its largest deal in 18 years. The acquisition added a new growth avenue to the company’s portfolio, at a time when its traditional food unit was under pressure when consumers were rapidly changing their eating habits, looking for fresher, greener and less sugary foods.
GIS is a stock that's likely to underperform in a bull market, but it's a defensive name that will outperform in a bear market.
Bottom Line
Adding solid dividend stocks to your retirment portfolio could create a sustained income stream to rely on. You should slowly start building your income portfolio when stock prices are attractive and yields are high. By pursuing this strategy, you will continue to earn steadily growing payouts even when the economy is in bad shape. Stocks like IBM and General Mills are two suitable candidates for this strategy.