Want to Retire on $500,000? 3 Stocks to Buy and Never Sell

Is it possible to retire on $500,000? Yes, but it won't be easy.

The median U.S. household income is $88,510, according to Motio Research. To make that much money with an initial investment of $500,000, you'd need an annual return of 17.7%. It's possible to reach that level, but quite difficult to pull off.

We haven't included Social Security yet, though. The average Social Security benefit for a retired worker is around $2,179 per month, or $26,148 per year. With this benefit included, you'd need to achieve an annual return of roughly 12.5% on a $500,000 portfolio to make the median household income. However, if you're married and both spouses receive the average Social Security retirement benefit, the needed annual return falls to 7.2%.

The good news is that some stocks pay dividends that could help you get close to (or even above) that magic level. If you want to retire on $500,000, here are three stocks to buy and never sell.

Image source: Getty Images.

1. Ares Capital

Ares Capital (NASDAQ: ARCC) is the largest publicly traded business development company (BDC). It has a $21.5 billion highly diversified portfolio. The portfolio's top 10 investments account for 10.4% of total assets, compared with 23.7% for Ares Capital's BDC peers.

This BDC leader offers an especially juicy dividend yield of 10.6%. Such an ultra-high yield usually raises red flags, but not in Ares Capital's case. The company has paid stable or increasing dividends for 67 consecutive quarters, a period that included the financial crisis of 2007-2009 and the COVID-19 pandemic.

Ares Capital continues to generate ample earnings to cover its distribution. It also has spillover income (undistributed taxable income carried forward) that could be used to fund future distributions if earnings are pressured.

What about Ares Capital's exposure to software-as-a-service (SaaS) companies that could be disrupted by artificial intelligence (AI)? Software and services companies make up over one-fifth of the BDC's portfolio. However, around 85% of these companies are considered low risk and "more poised to benefit from AI than to be disrupted," according to CEO Kort Schnabel.

2. Energy Transfer LP

Energy Transfer LP (NYSE: ET) is one of the top midstream energy companies in North America. It operates over 140,000 miles of pipelines that transport natural gas, natural gas liquids (NGLs), crude oil, and refined products.

The limited partnership pays an attractive distribution yield of roughly 7.2%. Energy Transfer's distribution coverage ratio is healthy. Management expects to increase the distribution by 3% to 5% per year on average.

The ongoing rapid build-out of AI data centers serves as a significant tailwind for Energy Transfer. As a case in point, the midstream company signed agreements with Oracle (NYSE: ORCL) last year to supply natural gas to three data centers.

This pipeline stock is also highly resilient when oil and gas prices fluctuate. Around 90% of Energy Transfer's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are fee-based and insulated from commodity prices.

3. Pfizer

Pfizer (NYSE: PFE) is the best-known of these three income stocks. The big pharmaceutical company markets blockbuster drugs, including the blood thinner Eliquis, cancer therapies Ibrance, Padcev, and Xtandi, and the rare heart disease drug Vyndaqel.

The drugmaker's forward dividend yield currently tops 6.8%. Pfizer has increased its dividend for 16 consecutive years and has paid a dividend for 350 consecutive quarters. Management remains committed to maintaining and growing the dividend over the long run.

To be sure, Pfizer faces some challenges. Its COVID-19 product sales are a shadow of what they once were. Several key products will lose patent exclusivity over the next few years, notably including Eliquis, Ibrance, and Xtandi.

However, the company has invested in developing new products and closing acquisitions to bolster its pipeline. As a result, Pfizer expects to deliver solid revenue growth beyond 2028, once the worst of its patent cliff is over.

An important caveat

Ares Capital, Energy Transfer, and Pfizer should be able to help make retiring on $500,000 a real possibility. There is an important caveat, though: Investing in only three stocks isn't wise. It's important to create a well-diversified portfolio.

Keith Speights has positions in Ares Capital, Energy Transfer, and Pfizer. The Motley Fool has positions in and recommends Ares Capital, Oracle, and Pfizer. The Motley Fool has a disclosure policy.