Dividend stocks are a great way to fund your retirement. Investing in dividend payers in a tax-deferred account like a 401(k) or an IRA with a dividend reinvestment plan (Drip) is a surefire way to build wealth over the long term as the money paid out in dividends allows you to buy even more stock, which leads to more dividend payments. All you have to do is pick a basket of dividend stocks that you can count on to deliver growth.
Luckily, our contributors have three dividend payers in mind that will help you build your nest egg. Keep reading to see why they recommend Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), Rio Tinto (NYSE: RIO), and General Motors (NYSE: GM).
Fueling the future
John Bromels (Royal Dutch Shell): Whether your nest egg has only a few years to grow or several decades, integrated oil major Royal Dutch Shell is a solid choice for growing it. Not only will its stellar dividend yield — currently about 5.4% — start helping you feather your nest right away, but the moves the company is making to prepare itself for the future means an investment in Shell should still have that egg growing five, 10, or even 20 years down the road.
One reason Shell is doing so well right now is, of course, high oil prices. With Brent crude prices above $60 per barrel for more than six months — and hovering around $75 a barrel today, the whole industry is benefiting. But thanks to strict cost-cutting measures Shell implemented during the oil price downturn, it’s benefiting more than most. The company’s most recent quarter, the first quarter of 2018, is a case in point: Net income was up 66.7% year over year, to $5.9 billion, plus the company is paying off short-term debt and raking in cash.
Well, that’s great in an era of high oil prices, but what if they come back down again? That’s just what Shell CEO Ben Van Beurden has been thinking about and why he’s moved aggressively to expand Shell’s liquefied natural gas business. LNG is a market that Van Beurden, along with several energy analysts, expects will grow even faster than oil in the coming years. That should help keep your nest egg safe even if the oil market softens.
Shell expects to start a $25 billion share buyback program soon, which makes now an excellent time to add shares of this oil industry giant and dividend powerhouse to your nest egg.
A nest egg made of iron, copper, and aluminum
Rich Smith (Rio Tinto plc): I’m not ordinarily one to recommend commodities stocks. With their high capital requirements and dependence on global economics — and in particular their dependence on competitors being wise enough not to flood the market with too much supply — there really is a lot of risk in this sector.
Still, I think Rio Tinto stock is cheap enough to account for a lot of this risk today.
This global producer of everything from iron and copper to aluminum and uranium currently sells for just 11.3 times its $8.8 billion in annual GAAP profit. Debt levels are reasonable — just $3.6 billion net of cash on hand, which isn’t bad for a company valued at nearly $100 billion in market cap. Best of all, despite operating in the notoriously cash-intensive resources industry, Rio Tinto actually boasts free cash flow levels greater than its reported GAAP income, with $9.4 billion in cash profits generated over the past year.
The miner is churning out plenty of cash to fund its chunky dividend yield of 4.9% (according to S&P Global Market Intelligence). In fact, less than half the company’s reported profit is needed to fund its dividend, allowing plenty of room for growth in years to come. With economies strong, the World Bank predicts global GDP growth will average better than 3% this year, and Rio Tinto itself is expected to boost profits at more than 10% annually over the next five years.
I see a long pathway to bigger profits and fatter dividends in Rio Tinto’s future.
Built to last
Jeremy Bowman (General Motors): One juicy dividend stock that has a lot going for it these days is General Motors. The Chevrolet parent offers a dividend yield of 4%, and with a dirt-cheap P/E valuation of less than 7, its payout ratio, or the percentage of income that goes to dividends, is just 24%, meaning it still has plenty of money left over to reinvest in the business and buy back shares after paying out dividends.
With the auto cycle past its peak, the company expects profits to be flat this year. However, it sees a return to growth next year when it releases a new line of pickup trucks. GM also got a big vote of confidence in its future last week when SoftBank, one of the world’s biggest start-up investors, said it would invest $2.25 billion in the automaker’s Cruise autonomous vehicle division, valuing that component at $11.5 billion. GM shares jumped 10% on the news, which served as recognition that the once-bankrupt company has emerged as one of the leaders in the self-driving revolution. In fact, it expects to deploy an autonomous ridesharing service in a number of cities next year, and has built a vehicle, the fourth-generation Cruise AV, that has no steering wheel, pedal, or manual controls.
Meanwhile, GM continues to execute on its core business with double-digit EBIT margins in North American and solid growth in China.
The automaker hasn’t raised its dividend since 2016 as profits have been flat, but that could change next year when earnings are expected to grow. Even without a dividend hike, GM looks like a smart bet as investors can sit back and collect a 4% yield while owning a piece of a company that could reap huge benefits when autonomous vehicles come to the fore.