Passive income is crucial to maintaining your lifestyle in retirement, especially given the uncertain future of Social Security benefits. The Office of Retirement and Disability Policy, part of the Social Security Administration, predicts that the program’s trust fund reserves could be depleted by 2037, potentially reducing scheduled benefits to 76% of their current level. This looming challenge underscores the importance of building alternative income streams for retirees.
As a result, many investors are turning to dividend stocks as a cornerstone of their retirement income strategy. However, not all dividend-paying companies offer the same potential for steady, growing income.
The most attractive dividend stocks share three key characteristics: payout ratios below 50%, dividend growth rates above 6%, and capital appreciation that keeps pace with the broader market. These characteristics often point to thriving companies with strong cash flows and shareholder-friendly management teams — exactly the type of companies that can provide retirees with a reliable, growing income stream.
Below is a quick guide to three Level 1 dividend growth stocks that meet these criteria and are therefore excellent candidates for a passive income portfolio with a long-term focus.
1. Lowe’s: The DIY Giant That Keeps Delivering
Lowe’s Companies (NYSE: LOW) Lowe’s, Inc. is a leading home improvement retailer with more than 1,700 stores in North America. The company offers a wide range of products for construction, maintenance and remodeling, targeting both do-it-yourselfers and professional contractors. Lowe’s business model benefits from the continued demand for home improvement products and strong brand recognition.
It has a staggering 15.2% 10-year dividend growth rate, one of the highest among large-cap stocks. With a payout ratio of just 36.7%, the company maintains a significant margin of safety for income investors, ensuring dividend sustainability even in the face of economic shocks.
This buffer dramatically reduces the risk of dividend cuts or suspensions, allowing investors to benefit from uninterrupted compounding. Lowe’s has also aggressively reduced its share count by 41% over the past decade, effectively boosting earnings per share and dividend growth.
The stock’s forward price-to-earnings (P/E) ratio of 20.4 compares favorably to the broader market, as reflected by the S&P 500which trades at 22.5 times expected 2025 earnings. This lower valuation could boost returns amid a market-wide shift toward value.
Finally, Lowe’s dividend yield of 1.89% is above average for similar companies. This characteristic increases the potential for a substantial income stream if the stock is held for a period of 10 to 20 years.
2. Lockheed Martin: A Defensive Move with Stable Returns
Lockheed Martin (NYSE: LMT) Lockheed Martin Inc. is a global aerospace and defense company specializing in the design, development and manufacture of advanced technology systems. The company’s diverse portfolio includes military aircraft, missile systems and space technologies. Lockheed Martin’s core business model is based on long-term government contracts, which provide a stable revenue stream and visibility into future earnings.
The company has a solid 10-year dividend growth rate of 7.7%, which is unusually generous for a company of Lockheed’s size. With a payout ratio of 45.1%, Lockheed Martin offers potential income investors a robust safety net, making it highly unlikely that the company will cut or suspend its dividend, even during severe economic downturns. This reliability provides consistent compounding for long-term investors.
Lockheed’s dedication to shareholder returns is also evident in the 22% reduction in the number of shares over the past decade, which has increased earnings per share and increased dividends.
The stock’s forward P/E of 19.9 is slightly below that of the broader market. However, Lockheed Martin’s dividend yield of 2.22% is significantly higher than the S&P 500 average of 1.35%. This higher yield, strong dividend growth and low payout ratio make the stock attractive to investors looking to build a steadily growing passive income stream.
3. Goal: Hit the bull’s eye for dividend growth
Goal (NYSE: TGT) Target, Inc. is a major retailer that operates a chain of discount stores in the United States. The company offers a variety of merchandise, including apparel, electronics, and groceries. Target’s business model focuses on providing a superior shopping experience through competitive pricing, on-trend product offerings, and a strong omnichannel presence.
Target is a dividend growth powerhouse, with an incredible 10% dividend growth over 10 years. The retailer’s 45.4% payout ratio also provides a significant cushion for income seekers, significantly reducing the risk of a dividend cut, even in a challenging economy.
Over the past decade, Target has reduced its share count by 27.7%, which has increased shareholder value and supported its aggressive dividend growth. The stock’s forward P/E of 16.3 represents a significant discount compared to the S&P 500.
Target’s dividend yield of 2.96% is also more than double the S&P 500 average of 1.35%, offering an attractive income proposition for dividend-focused investors. This relatively high yield, combined with Target’s blistering dividend growth and modest payout ratio, makes it an ideal choice for a passive income portfolio.
Top Picks for a Passive Income Portfolio
These three dividend growth stocks — Lowe’s, Lockheed Martin and Target — offer investors a powerful combination of current income, long-term sustainability and above-average dividend growth. As a bonus, all three dividend payers have outperformed the benchmark S&P 500 over the past 10-year period in terms of total returns (including dividends and assuming reinvestment), demonstrating the power of the dividend growth strategy and compounding returns.
These elite dividend growers are therefore the best choices for a passive income portfolio that is focused on the long term.
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George Budwell has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool recommends Lockheed Martin and Lowe’s Companies. The Motley Fool has a disclosure policy.
3 Incredible Dividend Growth Stocks That Can Generate Passive Income for a Lifetime was originally published by The Motley Fool
