If I was approaching retirement, I’d buy these 3 dividend stocks for passive income

Edward Sheldon highlights three UK dividend stocks he’d snap up if he was getting his investment portfolio ready for retirement.

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Dividend stocks can be a powerful retirement income tool. These stocks – which pay out money to shareholders on a regular basis – can potentially generate quite a big cash flow.

Here, I’m going to highlight three UK dividend stocks I’d buy if I was approaching retirement. I reckon these companies – which currently offer yields of between 4% and 9.5% – could be great long-term investments for me in my golden years.

A lower-risk stock

If I was nearing retirement, I’d want to own a lot of stable sleep-well-at-night dividend stocks. And one name that fits the bill here is Unilever (LSE: ULVR).

A leading consumer goods company, it tends to generate fairly stable revenues and earnings no matter what the economy’s doing. As a result, the stock’s much less volatile than the broader UK market.

This is illustrated by its ‘beta’ of 0.4. This metric indicates that for every 1% move in the UK market (up or down), Unilever shares typically only move around 0.4%.

As for the dividend yield, it’s around 4% today. That’s not the highest yield around. But held in a Stocks and Shares ISA, it could be completely tax-free.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The main risk with this company, to my mind, is that consumers ditch Unilever’s brands (Dove, Hellmann’s etc) for cheaper ones. In today’s high-interest-rate environment, we can’t rule this scenario out.

With the stock trading at a very reasonable valuation (the P/E ratio is just 16) however, I like the risk/reward proposition today.

Rising income

Another stock I’d choose for its stability and safety is Tesco (LSE: TSCO). Like Unilever, it has a stable business model (people always need to eat). And the stock is much less volatile than the overall UK market. Its beta is around 0.6, meaning the stock is also in the sleep-well-at-night camp.

As for the prospective dividend yield here, it’s currently about 4.5%, which is decent. And analysts expect the payout to rise in the years ahead.

I also see the potential for share price appreciation. That’s because the stock’s currently trading at a very low valuation (the P/E ratio is just 11).

That said, the cost-of-living crisis is a risk here too. It could result in consumers turning to lower-cost supermarkets such as Lidl and Aldi.

A high yield

Finally, I’d go with banking giant HSBC (LSE: HSBA). Now this stock is riskier than the other two. That’s because banking is a cyclical industry.

However, I like the long-term story here. In recent years, the bank’s shifted its focus to higher-growth areas such as Asia and wealth management. So I reckon it’s well positioned for the future.

As for the dividend, it’s very attractive at the moment. Last year, the bank paid out 61 cents to investors, which equates to a yield of 7.5% today. This year however, the company looks set to make a special payment, taking the total payout to around 76 cents – a yield of around 9.5%.

Given that Unilever and Tesco are lower on the risk spectrum, I’d be willing to take on the added risk of this stock to pick up the high yields on offer.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has positions in Unilever Plc. The Motley Fool UK has recommended HSBC Holdings, Tesco Plc, and Unilever Plc. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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