Passive income is important for maintaining your lifestyle in retirement. The Office of Retirement and Disability Policy says that by 2037, Social Security’s trust fund reserves may be used up. This could reduce scheduled benefits to 76% of current levels.
This challenge shows how important it is to build other income streams for retirees. Many investors use dividend stocks as a key part of their retirement income strategy. But not all dividend-paying companies offer the same potential for stable, growing income.
The best dividend stocks have three key traits: payout ratios below 50%, dividend growth rates over 6%, and capital appreciation that keeps up with the broader market. These often show thriving businesses with strong cash flows and shareholder-friendly management teams. Here are three companies that meet these criteria, making them great for a passive income portfolio with a long-term focus.
Lowe’s Companies is a leading home improvement retailer. It has over 1,700 stores across North America. Lowe’s offers a wide range of products for construction, maintenance, and remodeling.
It serves both do-it-yourselfers and professional contractors. Lowe’s business benefits from ongoing demand for home improvement and its strong brand. Lowe’s has a 15.2% 10-year dividend growth rate, one of the highest among large-cap stocks.
With a payout ratio of just 36.7%, the company has a big safety margin for income investors. This ensures its dividend is sustainable even in economic shocks. Lowe’s has also cut its share count by 41% over the past decade.
This boosts per-share earnings and dividend growth. The stock’s forward P/E of 20.4 compares well to the broader market at 22.5 times projected earnings. Lowe’s 1.89% dividend yield is above average for its peer group.
This enhances its ability to build an income snowball over 10 to 20 years. Lockheed Martin is a global aerospace and defense company. It specializes in designing, developing, and making advanced technology systems.
The company’s diverse portfolio includes military aircraft, missile systems, and space technologies.
Best traits of dividend stocks
Lockheed Martin’s core business revolves around long-term government contracts.
This provides stable revenue and visibility into future earnings. The company has a solid 7.7% 10-year dividend growth rate. With a 45.1% payout ratio, Lockheed Martin offers income investors a robust safety net.
This makes it unlikely the company will reduce or suspend its dividend even in serious economic downturns. Lockheed’s commitment to shareholder returns shows in its 22% reduction in share count over the past decade. This boosts per-share earnings and dividend growth.
The stock’s forward P/E of 19.9 is slightly below the broader market. But Lockheed Martin’s 2.22% dividend yield is much higher than the S&P 500’s 1.35% average. This makes it attractive for investors looking to build a steadily growing passive income stream.
Target is a major retailer operating discount stores across the United States. It offers various merchandise, including clothing, electronics, and groceries. Target focuses on providing a superior shopping experience through competitive pricing, trendy products, and a strong omnichannel presence.
Target is a dividend growth powerhouse with an incredible 10% 10-year dividend growth rate. The retailer’s 45.4% payout ratio provides a cushion for income seekers. This significantly reduces the risk of a dividend cut even in a challenging economy.
Over the past decade, Target has reduced its share count by 27.7%. This boosts shareholder value and supports its aggressive dividend growth. The stock’s forward P/E of 16.3 is a significant discount compared to the S&P 500.
Target’s 2.96% dividend yield is also more than double the S&P 500’s 1.35% average. This offers a compelling income proposition for dividend-focused investors. Lowe’s, Lockheed Martin, and Target offer investors a powerful combination of current income, long-term sustainability, and above-average dividend growth.
All three have outperformed the S&P 500 over the past 10 years in total returns. This showcases the power of the dividend growth strategy and compounding returns. These elite dividend growers stand as top picks for a long-term passive income portfolio.
