Passive income is crucial for 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, projects that by 2037, the program’s trust fund reserves might be exhausted, potentially reducing scheduled benefits to 76% of their current levels. This looming challenge underscores the importance of building alternative income streams for retirees.

As a result, many investors turn to dividend stocks as a cornerstone of their retirement income strategy. However, not all dividend-paying companies offer the same potential for stable, growing income.

The most attractive dividend stocks share three key characteristics: payout ratios below 50%, dividend growth rates exceeding 6%, and capital appreciation that keeps pace with the broader market. These traits often indicate thriving businesses with strong cash flows and shareholder-friendly management teams — precisely the type of companies that can provide a reliable, growing income stream for retirees.

Here is a nuts-and-bolts overview of three tier 1 dividend growth stocks that tick these boxes, making them prime contenders for a passive income portfolio with a long-term focus.

1. Lowe’s: The home improvement giant that keeps on giving

Lowe’s Companies (NYSE: LOW) is a leading home improvement retailer, operating over 1,700 stores across North America. The company offers a wide range of products for construction, maintenance, and remodeling, catering to both do-it-yourselfers and professional contractors. Lowe’s business model benefits from the ongoing demand for home improvement and its strong brand recognition.

It has a blistering 15.2% 10-year dividend growth rate, one of the highest among large-cap equities. With a payout ratio of just 36.7%, the company maintains a significant margin of safety for income investors, ensuring the sustainability of its dividend 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 per-share earnings and dividend growth.

The stock’s forward price-to-earnings ratio (P/E) of 20.4 compares favorably to the broader market, as represented by the S&P 500, which trades at 22.5 times 2025 projected earnings. This lower valuation could amplify returns in a marketwide tilt toward value.

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Lastly, Lowe’s 1.89% dividend yield is above average for its peer group, a feature that enhances its ability to build an income snowball when held over a 10- to 20-year time span.

2. Lockheed Martin: A defensive play with stable returns

Lockheed Martin (NYSE: LMT) is a global aerospace and defense company, specializing in the design, development, and manufacturing of advanced technology systems. The company’s diverse portfolio includes military aircraft, missile systems, and space technologies. Lockheed Martin’s core business model revolves around long-term government contracts, providing a stable revenue stream and visibility into future earnings.

The company has a solid 7.7% 10-year dividend growth rate, which is unusually generous for a company of Lockheed’s size. With a payout ratio of 45.1%, Lockheed Martin offers prospective income investors a robust safety net, making it highly unlikely the company will reduce or suspend its dividend even during serious economic downturns. This reliability ensures consistent compounding for long-term investors.

Lockheed’s commitment to shareholder returns is further evident in its 22% reduction in share count over the past decade, effectively boosting per-share earnings and ramping up its dividend growth.

The stock’s forward P/E of 19.9 sits slightly below that of the broader market. However, Lockheed Martin’s dividend yield of 2.22% is substantially higher than the S&P 500’s average of 1.35%. This higher-yield, top-tier dividend growth rate and low payout ratio make the stock attractive for investors looking to build a steadily growing passive income stream.

3. Target: Bull’s-eye for dividend growth

Target (NYSE: TGT) is a major retailer, operating a chain of discount stores across the United States. The company offers various merchandise, including clothing, electronics, and groceries. Target’s business model focuses on providing a superior shopping experience through competitive pricing, trendy product offerings, and a strong omnichannel presence.

Target is a dividend growth powerhouse with an incredible 10% 10-year dividend growth rate. The retailer’s 45.4% payout ratio also provides a considerable 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%, boosting shareholder value and supporting 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’s average of 1.35%, offering a compelling income proposition for dividend-focused investors. This relatively high yield, coupled with Target’s scorching dividend growth rate 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 prior 10-year period in terms of total returns (including dividends and assuming reinvestment), showcasing the power of the dividend growth strategy and compounding returns.

These elite dividend growers thus scan as top picks for a long-term-focused passive income portfolio.

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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 Provide a Lifetime of Passive Income was originally published by The Motley Fool