3 reliable dividend aristocrats to help supplement retirement income

As investors move from the asset accumulation phase of their lives to the asset distribution phase, capital preservation takes precedence over growth. Along with bonds and risk-free assets like treasury bills or certificates of deposit, dividend-paying stocks can be a great way to supplement retirement income. However, not all dividend-paying stocks are created equal, as some companies pay large dividends that they cannot afford or do not regularly increase their dividend distributions. This is what makes Dividend Aristocrats so unique.

This category of companies has paid and increased its dividends for at least 25 consecutive years, which adds a layer of confidence to the investment thesis. Additionally, Dividend Aristocrats tend to be industry-leading companies with diverse and global operations. Target (TGT -3.47%), caterpillar (CAT -0.89%)and Emerson Electric (EMR -1.78%) are three that stand out as best buys now. Here’s why.

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The worst of Target’s stock crisis may be over

Daniel Foelber (target): Target and other big box retailers walmart have been particularly affected by inflation, as customers limit their spending on discretionary purchases. During its first-quarter 2022 earnings call, Target told investors it had too much inventory following a slowdown in consumer spending.

Unsurprisingly, the second quarter was filled with deep discounts to try to get inventory out in time for the shift into fall and the holiday season. The discounts may have allowed Target to sell more products and achieve impressive revenue growth. But the strong sales also dealt a massive blow to its operating margin and profits.

TGT Operating Margin Chart (Quarterly)

TGT Operating Margin Data (Quarterly) by YCharts

The silver lining is that the worst may be over for Target, as the company believes its inventory levels are more reasonable now and positions it better for the holiday quarter. It’s understandable that Target is mismanaging inventory given the volatile rise and fall in COVID-19 cases associated with ongoing supply disruptions. After all, forecasting is a big part of Target’s business. And forecasting has been very difficult for retailers over the past two years.

Even though Target continues to struggle in the near term, the company remains an industry leader that has successfully invested in e-commerce and curbside pickup. The stock has a price/earnings ratio of just 14.3 and a dividend yield of 2.5%. Additionally, Target is a Dividend King that has paid and increased its dividend for 50 consecutive years.

For investors looking for a reliable passive income stream from an easy-to-understand company, Target now stands out as an obvious buy.

A dividend aristocrat for the ages

Lee Samaha (Caterpillar): Construction, mining, energy, rail and industrial equipment company Caterpillar may seem like an odd candidate for a reliable dividend stock — after all, its earnings and cash flow are highly cyclical and fluctuate with the economy.

That said, there are three main reasons why Caterpillar fits the bill. First, the company has already demonstrated its commitment and ability to increase shareholder dividends for 29 consecutive years.

Second, management acknowledges the cyclicality of its earnings, but it estimates that its underlying free cash flow will be between $4 billion and $8 billion throughout the economic cycle. Second, since the last dividend payout was approximately $2.3 billion, Caterpillar’s dividend is well hedged through the cycle.

Third, management’s focus on growing its services revenue will reduce the cyclicality of its earnings. Indeed, during the recent earnings call, management confirmed that it was on track to double its services revenue from $14 billion in 2016 to $28 billion by 2026. the company’s total last year was $51 billion.

Meanwhile, although cyclical, Caterpillar’s end markets are destined for long-term growth. So as long as there is a need for physical products, infrastructure, transport and buildings, there will be a need for its machines.

A royal choice to put a load on your passive income

Scott Levine (Emerson Electric): During the recent market downturn, many retirees – or nearing retirement – ​​were likely worried that their golden age was losing its luster. For those who have bolstered their retirement portfolios with resilient stocks, however, fears may have been less severe. Resilient dividend stocks, in fact, are an even bigger choice, which is why the Dividend King Emerson Electric and its forward dividend yield of 2.3% represent a compelling option for investors hungry for passive income.

Primarily, retirees seek to supplement their income with prudent investments that pose minimal risk. To that extent, Emerson Electric is an ideal choice. The company, which specializes in automation as well as air conditioning technologies, has steadily increased its payout to shareholders for 65 years. This is no small feat; in fact, there are few other companies that can boast such an impressive achievement.

By digging into the company’s financials, investors will find the primary reason Emerson Electric is able to steadily increase its dividend: high free cash flow generation. And it’s not as if the company only rewards shareholders with the cash it generates; Emerson Electric also returns capital to shareholders through share buybacks. In 2022, for example, Emerson Electric projects free cash flow generation of $2.5 billion, dividend payments totaling $1.2 billion, and $500 million in share buybacks.

Chart of EMR's dividend per share (annual)

EMR data on dividend per share (annual) by YCharts.

For those looking to shore up their retirement portfolios with a solid dividend stock that’s also on sale, Emerson Electric should be on their radars. The shares are currently trading at 16.4 times forward earnings, which is a discount to their five-year average multiple of 19.9 times forward earnings.

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