16 Smart Picks for Income Investors

Street Smart

11 Great Dividend Stocks for Income Investors

The best income strategy in this low-rate environment is to leaven your portfolio with stocks that pay solid dividends.


The Federal Reserve’s decision to raise interest rates by one-quarter of a percentage point provides little solace to investors who have been trying to squeeze a decent stream of income from their portfolios over the past seven years. Yields on bonds remain near record lows, and it’s unlikely they will rise much this year.

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In early 2016, a five-year Treasury bond yielded a mere 1.7%. By contrast, such bonds paid an average of at least 4% in a majority of the past 80 years. If you’ve saved $1 million and hope to live off the income by investing in low-risk government securities, you’ll have a tough time. Put the money in 10-year Treasuries, which yield 2.3%, and you’ll get checks totaling just a bit more than $23,000 a year before taxes.

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Interest rates represent the price of borrowing money, and like all prices, they are determined by supply and demand. When the Fed raises rates, it reduces the supply of money by raising the cost to the banks that put cash into circulation. But the demand side is another matter entirely. Businesses and consumers demand more money when the economy is growing robustly. It’s not, and higher rates could depress demand further. We could be in a long period of low interest, similar to the era from 1935 to 1956, when the annual income return on a 20-year T-bond never got above 3%.


The litany of low yields today is depressing. Five-year CDs are averaging 0.9%; the average taxable money market fund, 0.05%; mortgage-backed securities, 2.5%; double-A-rated corporate bonds maturing in 10 years, 2.9%. You won’t be getting annual interest income of 5% through fixed-income investments with little risk anytime soon. If you need a flow of cash from your portfolio, you’ll have to adopt a different strategy.

One way to reach for higher returns is to take on more risk by investing in bonds issued by young or shaky borrowers. Buying a bond is extending a loan. Lenders charge higher interest rates if the borrower is less likely to pay the money back. Especially for investors on the brink of retirement, the extra return for going down the quality ladder is rarely worth the extra risk. Look at what happened last year to funds that invest in high-yield bonds (debt issued by shaky companies). SPDR Barclays High Yield Bond ETF (symbol JNK), an exchange-traded fund that provides a benchmark for the junk-bond market, lost 6.8%, taking into account both payments from the bonds in its portfolio and the decline in market prices of those bonds.

Extending maturities. Another strategy for boosting income is to invest in long-term bonds because debt that matures far into the future fetches higher rates. For example, a California general obligation muni­cipal bond, backed by the state’s taxing authority and maturing in 2042, has a current yield of 4.1%. For someone in the top federal income tax bracket of 43.4%, that’s the equivalent of 7.2% from a taxable bond. A General Electric bond due in December 2049 yielded 4.1%. The problem with long-term debt is that no one has the slightest idea what will happen to consumer prices many years from now. Inflation could erode the value of your interest and principal significantly. In addition, many bonds have call features, so if rates fall, the issuer can cash in your bonds early.

Instead, opt for moderation. For instance, I like bonds issued by McDonald’s that mature in 10 years and yield 3.7%; the bonds are rated triple-B-plus. (Recommendations are in boldface.) I also favor bonds issued by the Tennessee Valley Authority, a federal agency, maturing in May 2030 and yielding 3.5%. (The TVA is a government-sponsored enterprise, but its bonds lack an explicit guarantee from Uncle Sam. If the TVA were to default on its debt, the Treasury would not be obligated to make bondholders whole. You can buy TVA bonds through banks and brokerage firms.) If you prefer funds, consider iShares Aaa-A rated Corporate Bond ETF (QLTA), which owns highly rated corporates mainly maturing in five to 10 years and yields 2.8%.


Go for dividends. But the best income strategy in this low-rate environment is to leaven your portfolio with stocks that pay solid dividends. Although the issuer of a bond promises to pay interest at a fixed rate, the issuer of a share of stock makes no such guarantees. If the money’s there, you get a dividend, which may rise or fall or even disappear from one quarter to the next.

Some companies have spectacular records of increasing their payouts year in and year out. Johnson & Johnson (JNJ), the health care products firm, carries the Value Line Investment Survey’s top rating for safety and financial strength. The company has raised its dividend for 53 straight years. The current yield on the stock is 2.9%, so a $10,000 investment throws off $290 a year. Dividends have increased at an annualized rate of 8.6% over the past decade; but even if they rise at just a 6% annual rate, your Johnson & Johnson stock will be paying you $519 in 2026, or a yield of 5.2% on your original investment. That’s the difference between a stock and a bond. Typically, as profits rise, so do dividends. But a bond’s interest payments, while guaranteed (assuming the issuer doesn’t default), remain the same each year.

Other companies that have increased their dividends for more than 50 con­secutive years include Coca-Cola (KO), currently yielding 3.1%; Procter & Gamble (PG), 3.3%; and Cincinnati Financial (CINF), a property-and-casualty insurer, 3.1%. An ETF called ProShares S&P 500 Dividend Aristocrats (NOBL) invests only in companies that have increased their payouts for at least 25 years. The yield from its 52 holdings is just 2.0%. If that’s too low for your taste, you can scan the list for individual standouts, such as Consolidated Edison (ED), which serves the New York area, yielding 4.0%; Kimberly-Clark (KMB), personal care products, 2.8%; Pepsico (PEP), soft drinks and snacks, 2.8%; and HCP (HCP), a real estate investment trust, or REIT, that owns health care properties, 5.9%.

Speaking of REITs, their dividends tend to be less predictable than those of other stocks, but the reward tends to be worth the added risk. Consider Realty Income (O), which invests in various kinds of properties all over the U.S. and yields 4.4%; Public Storage (PSA), which owns self-storage facilities, 2.7%; and AvalonBay Communities (AVB), multifamily housing, 2.7%. A good way to buy the sector is through Vanguard REIT Index (VGSIX), a passively managed mutual fund that currently yields 3.8%. Its expense ratio is just 0.26%.


And, of course, those returns are a reminder that stock prices tend to go up over time, so you earn more than dividends from your investment. In fact, in this era of low interest rates, getting income returns of 5% to 6% may require you to sell good dividend payers from time to time and pocket the capital gains. That’s perfectly acceptable.

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James K. Glassman, a visiting fellow at the American Enterprise Institute, is the author, most recently, of Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. He owns none of the investments mentioned.