3 Dividend Stocks Offering Yields Above the 3.6% Social Security COLA

Social Security benefits are set to increase by 3.6% under the cost-of-living adjustment. That boost is added to the monthly payment retirees already receive, helping benefits keep pace with inflation, but it does nothing for the money sitting in a brokerage account.

To increase income alongside that benefit, investors need dividend-paying stocks with the cash generation to support reliable payouts that can keep growing. The three companies below each yield more than the COLA figure, and each was checked for dividend coverage before yield was considered.

It is also worth separating a COLA from a dividend yield. A COLA is a percentage increase applied to a benefit already being received. For example, a hypothetical $2,000 monthly check would rise by $72 a month with a 3.6% adjustment. A dividend yield, by contrast, is the annual cash payment divided by the stock price, and yield alone does not reveal whether a payout can grow or even be sustained. In other words, the COLA here serves only as a benchmark for how quickly retirement income is rising; each dividend still depends on whether the underlying business can afford it.

PepsiCo: Global Brands Supporting a Dividend With a Long Record of Annual Increases

PepsiCo (NASDAQ:PEP | PEP Price Prediction) sells snacks, foods and beverages in more than 200 countries and territories. Its brands include Pepsi, Lay's, Doritos and Gatorade. At $136.28, the stock yields 4.13%. Some of that yield comes from a lower share price. The stock has fallen 6.41% over the past year and trades well below its 52-week high of $166.41.

Dividend safety: PepsiCo paid $5.80 per share in dividends against trailing EPS of $7.95, giving it a payout ratio of about 73% of earnings. Free cash flow coverage is tighter. The free cash flow yield of 4.15% is roughly in line with the dividend yield, suggesting the company is generating about enough free cash to fund the payout. Management plans to return $8.9 billion to shareholders this year, including $7.9 billion in dividends. It is also targeting free cash flow conversion of at least 80%. Debt looks manageable, with operating earnings covering interest expense 10.26 times.

Track record: PepsiCo's dividend history extends back to 1999, and the quarterly payment has increased every year in that record. The latest quarterly dividend is $1.48, up from $1.4225, which puts the forward annual dividend at $5.92.

Bull case: International growth is helping offset weakness in U.S. snacks. In the latest quarter, adjusted EPS of $2.34 topped the $2.30 estimate. Revenue climbed 5.6% to $25.27 billion, and Latin America Foods grew 14%. Demand for chips and sports drinks tends to hold up even in a downturn, which gives retirees a dependable source of cash flow.

Risk: North American snacks remain under pressure. Core operating profit in that segment fell 12%, and higher input costs led management to lower its core EPS growth outlook to 2.5% to 3.5%. Slower earnings growth could translate into smaller dividend increases.

Realty Income: Monthly Payments Backed by an A-Rated Balance Sheet

Realty Income (NYSE:O) is a real estate investment trust that owns more than 15,500 properties. It leases them to 1,798 clients across 92 industries, mostly under long-term net leases in which tenants pay taxes, insurance and maintenance. At $57.05, the stock yields 5.43%. That yield is not being driven by a sharp price drop, since the shares are nearly flat over the past year, down just 0.05%.

Dividend safety: For a REIT, adjusted funds from operations, or AFFO, is the better measure of coverage because depreciation can make GAAP earnings look lower than the actual cash generated. Second-quarter AFFO was $1.09 per share, compared with $0.8115 in dividends paid. That implies a payout ratio of about 74% of AFFO. The free cash flow yield of 7.18% is above the dividend yield. The balance sheet carries A-range credit ratings from all three major agencies: Moody's A3, S&P A- and Fitch A. Net debt is 5.4 times adjusted EBITDAre, and occupancy is 98.8%.

Track record: Realty Income has increased its dividend for 115 consecutive quarters and is part of the S&P 500 Dividend Aristocrats index. Its payment history shows a monthly dividend every month since 1999, with the payout rising from $0.17 to $0.2715. The forward annual dividend is $3.258.

Bull case: Monthly distributions fit the way many retirees budget. The company continues to add properties, investing about $2.6 billion in the second quarter at a 7.3% initial cash yield. On re-leased properties, it recovered 102.7% of prior rent. A $6 billion hyperscale data center joint venture also adds a new source of rent alongside retail and industrial assets.

Risk: Tenant credit quality remains a concern. About 65.7% of annualized base rent comes from tenants without investment-grade ratings. A wave of retail bankruptcies could weigh on AFFO.

Verizon: Highest Yield in the Group, With Free Cash Flow Covering It Comfortably

Verizon (NYSE:VZ) provides wireless and broadband service to roughly 94.1 million postpaid phone connections and about 17.1 million broadband connections. The stock yields 6.18%, putting it in ultra-high-yield territory. Even after a strong run, the yield remains high: shares are up 25.36% over the past year to $45.07, and the stock trades at about 9 times forward earnings.

Dividend safety: Free cash flow reached $6.43 billion in the second quarter, up 27.1% from a year earlier. The quarterly dividend of $0.7075 across 4,154,775,000 shares costs about $2.94 billion, which is roughly 46% of that quarter's free cash flow. That still leaves room for buybacks, and Verizon had repurchased $3.5 billion of stock through the second quarter. Net unsecured debt stands at 2.5 times adjusted EBITDA.

Track record: Verizon's quarterly dividend has increased every year in its dividend history, rising from $0.46 in 2009 to the current $0.7075. The forward annual dividend is $2.83.

The bull case: the core business is improving. Verizon added 184,000 postpaid phone customers, compared with a loss of 9,000 in the prior year. Postpaid phone churn, or the percentage of customers who leave, improved to 0.92% from 0.97%. Adjusted EBITDA margin expanded to 40.1%. The Frontier Communications acquisition lifted fiber connections to about 10.9 million. Adjusted EPS of $1.30 beat the $1.27 estimate. Phone and internet bills get paid in nearly any economy, and that cash flow supports this dividend.

Risk: Debt remains the main issue. Total unsecured debt is $136.5 billion. Leverage rose to 2.5 times from 2.2 times at the end of the prior year after the Frontier deal. Higher refinancing costs could leave less cash available for future dividend increases. Verizon appears on Barron's list of stocks to watch this week, making the next quarterly update an important check on the leverage trend.

Income That Can Grow With Your Benefit

These three stocks appeal to retirees looking for income from three different sources: consumer staples, monthly rent and telecom services. Realty Income offers the strongest coverage, supported by an A-rated balance sheet and monthly payments. Verizon provides the highest yield and the largest free cash flow cushion. PepsiCo has the longest record of annual dividend increases, even though its free cash flow coverage is tighter than the other two. Together, they offer portfolio income that each business appears able to fund, alongside a Social Security check that rises with the COLA.