Are you approaching retirement? Buy These 3 Stocks to Generate Passive Income

Parking a certain percentage of your money in dividend-paying stocks can be very rewarding. Some major consumer brands have paid dividends for decades (some for over a century). This provides a way to keep your money invested in stocks that can grow your holdings over time, while still earning short-term cash income. In other words, you can maintain a cushion of cash for as long as you need with well-chosen income stocks.

Three Motley Fool contributors were recently selected McDonald’s (MCD 0.57%), Home deposit (HD 1.63%)and Procter & Gamble (PG 0.61%) as good places to start generating passive income. These companies make products that people use every day and won’t become obsolete anytime soon. Let’s find out a bit more about these three dividend-paying stocks.

1. McDonald’s Provides a Revenue Stream in Good and Bad Times

Parkev Tatevosian (McDonald’s): Passive income at regular intervals with no set end date can go a long way to making retirement more enjoyable. One of my favorite sources of passive income right now is McDonald’s stock. The company pays a quarterly dividend which has increased significantly over the years.

Each year, McDonald’s paid a dividend per share of $2.87 in 2012. This figure increased to $5.25 in 2021. The current dividend (when annualized) is $5.52 and yields 2.16% . Over the past decade, it has increased by 7.9% per year on average. Investors today can reasonably expect their McDonald’s dividends to continue to grow over the next few years. This is because dividends are paid out of a company’s profits and McDonald’s has a long history of generating (and increasing) profits. The company’s dividend payout ratio is 66%, which is manageable. During the same period mentioned above, McDonald’s earnings per share increased from $5.36 to $10.04 (8.7% annualized). Management made improvements to the business, such as investing in digital controls, which helped support the increase in profitability.

Also, since McDonald’s sells affordable items, it reduces the risk of losing customers during recessions. On the contrary, more consumers may choose McDonald’s over more expensive out-of-home dining options when budgets are tight. If I was approaching retirement age, I would want this dividend aristocrat in my investment portfolio.

2. Home Depot: A Reliable and Growing Dividend, More Growth

Jennifer Saibil (Home Depot): Dividends are popular among several cohorts of investors, but most retirees see dividends as a source of real income to replace missing wages. This means that performance is not the only factor they need to consider. Retirees also need stable and growing dividends, so they can rely on passive income that can keep up with inflation.

Home Depot is a great choice for dividends because of its high yield, growth and reliability. The dividend yields 2.5% at the current price, and the dividend itself has been steadily increased over the past 10 years. The annual dividend has increased from $1.16 per share in 2012 to $7.60 per share in 2022. This represents an annual increase of 55.5% over this period. The current dividend payout ratio is a very manageable 43.6%, suggesting ample room for future growth.

HD Dividend Data by YCharts

The Home Depot is the world’s largest home improvement retailer by both store count and sales, and it has invested in its growth over the past few years to stay relevant and maintain its lead. Just before the pandemic, the company spent over $1 billion to upgrade its omnichannel network. This led to lower earnings at the time and some investors lost confidence, driving the stock price down. But the company was well prepared for the surge in sales in the early months of the pandemic, and it was able to offer competitive in-store and digital purchase options and meet the high demand. Since then, profits have soared and management continues to invest in better distribution and ordering systems. The Home Depot raised its guidance for fiscal 2022 (fiscal year ends Jan. 31) after a better-than-expected performance in the first quarter, and revenue rose 6.5% year-over-year in second quarter of the fiscal year (ended July 31) to reach $43.8 billion. .

The hidden truth is that dividend stocks often offer some of the highest gains over time. Dividend stocks are generally well-established and secure, and companies generate enough cash to grow their businesses at scale. Even without its dividend, Home Depot stock has gained more than 364% over the past 10 years, giving shareholders even more reason to own it.

3. Procter & Gamble has paid a dividend for 132 years

John Ballard (Procter & Gamble): P&G’s strong portfolio of consumer brands produced respectable results for investors in a difficult year. Sales and profits have been growing, both growing at mid-single digit rates in fiscal 2022 (which ended in June). Although management expects a lower rate of growth in fiscal 2023, the stock remains a long-term investor favorite due to its outstanding dividend history.

The company has paid a dividend for 132 years and has increased the dividend every year for 66 consecutive years. He increased the payment by another 5% in April this year. At a current payout of $3.52 per share, the dividend yield is an attractive 2.57%.

Management’s efforts to redouble its efforts on more profitable product categories over the past few years have paid off for shareholders. Better sales growth has pushed the stock up 48% over the past five years. Improvements to product packaging, marketing and performance should provide good visibility for sales. Additionally, management remains committed to profitability across all areas of the business, which should continue to generate strong profitability to fund further dividend increases for the foreseeable future.

P&G pays nearly two-thirds of its free cash flow over the past 12 months in the form of dividends, allowing it to pay a growing stream of income to shareholders while continuing to invest in the future of the company. With a forward price-to-earnings ratio of 23, P&G stock isn’t cheap, but it should perform roughly in line with the stock market’s average return while offering an above-average return.

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