James Bray
If you’re building a retirement portfolio that will allow you to cover your living expenses with passive income from dividends, it’s usually wise to look for investments that meet the following criteria: Follow four basic requirements:
1. A durable and defensible business model It will stand the test of time as well as economic and technological disruption.
2. A strong investment-grade balance sheet that can support the company and its dividends even in difficult times.
3. The yield is sufficient to allow the cash flows from the portfolio to cover living expenses comfortably without requiring too large an initial savings amount, thus eliminating the need to postpone saving for retirement for a long period of time.
4. Expectations of dividend growth that will match or exceed the rate of inflation over the long term, at least in the aggregate.
In this article, we will discuss four stocks that meet these requirements at the beginning of June.
1. Enterprise Product Partners (Electronic Bulletin)
EPD excels on all four of these fronts: its business model is robustly defensive and durable, its energy infrastructure is strategically located and well diversified across energy asset types and geographies, and it has proven extremely resilient by delivering stable cash flows and returns on invested capital of over 10% through all market and energy sector conditions. Additionally, it has an extremely strong balance sheet with an A- credit rating from S&P, a very low leverage ratio of 3.0x, ample liquidity and a well-layered debt maturity calendar.
Additionally, the dividend is very attractive, with a forward dividend yield of approximately 7.5%. The dividend represents 1.7 times distributable cash flow. When you combine the strong growth pipeline that the company is investing in with its current 5% dividend growth rate and 25-year streak of annual dividend increases, EPD is likely to continue growing its dividend at an above-inflation rate for many years to come.
2. Real estate income (oh)
While Realty Income may not be growing as fast as it once did due to its large size and rising cost of capital that has limited aggressive growth, its extensive diversification makes it one of the safest REITs out there. Additionally, it has an A- credit rating from S&P and operates a triple net lease business model that makes it highly defensible and able to generate stable cash flows even in tough times. Additionally, the majority of its revenue comes from consumer staples retail, which is less vulnerable to e-commerce, making it highly resilient to disruptions.
In addition to a strong balance sheet and business model, the company offers an attractive dividend yield of 6% for the next 12 months and is well covered by adjusted operating funds, making it an attractive cash flow generator to look forward to for many years to come. Realty Income is also expected to grow its dividend per share at a 5% CAGR through 2028, giving it the potential to continue growing its dividend at a pace above the rate of inflation for many years to come.
3. VerizonVZ)
While we’re generally cautious in the communications sector due to its high capital requirements and competitive nature, Verizon is expected to grow its dividend at about 2% annually over the next few years. Combined with a 6.7% dividend yield over the next 12 months that’s well covered by cash flow, the company should be able to pay a high enough yield that will grow at least close to the expected rate of inflation, if somewhat delayed. Additionally, the company’s very large and established position in essential services makes it a defensive and durable company. Finally, the investment-grade balance sheet means it can continue to support the dividend going forward.
4. EnbridgeENNB)
Enbridge has some overlap with Enterprise Products Partners in the midstream sector, but has significant and growing exposure to regulated utilities and regulated energy infrastructure, as well as some exposure to renewable generation. With a 7.5% dividend yield over the next 12 months, and dividend growth of 3.1% per share through 2028, Enbridge meets our initial dividend yield and dividend growth requirements. Furthermore, given its exposure to regulated assets and the fact that most of its unregulated assets are under long-term contracts almost entirely with investment-grade counterparties, Enbridge’s BBB+ credit rating from S&P meets our durable and defensible business model and sufficiently strong balance sheet requirements at a high level.
Investor View
These four stocks combined, allocated equally among each, would yield a weighted average dividend yield of approximately 6.9%, a weighted average expected annual dividend growth rate of 3.75%, and a weighted average credit rating of approximately BBB+. All of these businesses are highly defensible, stable, and turbulent, making them reliable cash flow generators and dividend payers. As a result, these companies can provide the basis for a well-diversified and very established retirement portfolio to fund your retirement lifestyle, while also not having to worry too much about purchasing power keeping up with inflation.
There are plenty of other attractive investment opportunities in the high-yield space, many of which we would actually prefer to the stocks profiled in this article, but for investors who are less concerned with maximizing total returns and simply want an attractive, reliable source of passive income that will match or beat inflation, finding four stocks across a diverse range of sectors to beat them is a challenge.
