Dividend stocks will be my go-to option for topping up the State Pension when the time comes. Sadly, not all are created equal.
Here’s what I’d look for and the stock I like.
Reliable (and growing)
While it’s tempting to jump for the highest-yielder, these can often be the companies to avoid. A huge dividend yield could be because the share price has plummeted due to poor trading. In reality, that cash might never arrive if things don’t improve.
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When I look for income-generating shares, I tend to gravitate toward those that have shown an ability to pay up regardless of what’s happened in the wider economy. If this means getting a lower yield than elsewhere, so be it.
I’m also hunting for those that have a solid history of increasing their dividends. This is usually because they’re very good at growing revenue and profit — exactly the sort of business a long-term-focused Fool like me should be drawn to.
With this in mind, here are two companies whose shares I’d be very interested in buying as I swap the rat race for the beach.
2 resilient stocks
Britvic (LSE: BVIC) ticks the boxes mentioned above. Owning a portfolio of ‘sticky’ brands that people buy out of habit has allowed it to steadily increase its cash returns for many years. Right now, it’s set to yield 3.5% in its current financial year. That’s not enough to beat inflation — but few dividend stocks do at the moment! However, it’s an awful lot more than even the best Cash ISA.
Another defensive dividend stock is, well, defence giant BAE Systems (LSE: BA). Sadly, the conflict in Ukraine has shown just how essential it is for nations to protect themselves from physical (and digital) threats. It’s an unfortunate fact of life but it has allowed BAE to increase dividends like clockwork every year.
The FTSE 100 member is set to yield 3.2% as I type. Reassuringly, this payout is expected to be easily covered by profit.
Points to remember
Obviously, there are risks and drawbacks with even the most robust-looking dividend stocks.
As higher prices bite, some shoppers may be forced to switch from Britvic’s drinks to own-brand alternatives. This may temporarily impact earnings which, in turn, could affect the company’s ability to increase cash returns to its shareholders. And BAE is currently susceptible to supply chain constraints. It’s also having issues finding the right people to fill roles across its operations.
There are ways of limiting the damage. Perhaps the easiest way is to ensure that I’m invested in 10-20 very different companies. If one or two are forced to cut their dividends, I shouldn’t see too much difference in the amount of income I receive.
Not just for retirement
As much as I rate these dividend stocks for retirement, it’s important to state that I wouldn’t be against buying them before I get to my golden years. The only thing I need to remember here is that my end result will likely be an awful lot better if I’m able to reinvest my dividends rather than spend them.
Buying more shares allows me to benefit more from the wonder that is compound interest. That’s the secret sauce that could turn a good retirement into an extremely comfortable one.
