In today’s environment of low interest rates, it is virtually impossible for retirees to earn enough income from traditional sources such as bonds and CDs to cover their costs. This leads many to seek riskier assets such as dividend paying stocks for their portfolio income. But there is a major problem with this approach: dividends are never guaranteed payments, and when a company reduces its dividend, its stock price also often goes down.
Therefore, when retirees seek income-producing stocks, they must look beyond the simple declared dividend yield and the quality and sustainability of that dividend. There are still no guarantees when it comes to dividends, but these three income securities are great for retirees when looking for potential sources of income from their portfolios.
A pipeline giant who was once bitten and is now twice shy
Companies with a fairly recent history of dividend cutting may not seem like an ideal candidate for income-seeking investments, but the pipeline giant Kinder Morgan (NYSE: KMI) may be an exception. At the end of 2015, Kinder Morgan was forced to cut its dividend not because its operations were suffering, but rather because it had over-leveraged its balance sheet after buying a sister pipeline company.
He used the money he freed up from that dividend cut to help strengthen his balance sheet and has since started to restore his payout to his shareholders. In fact, it just announced a 3% payout increase and is now offering investors $ 0.27 per share per quarter. While it’s still below the dividend level before the 2015 cut, it’s a much more bearable dividend today than this higher payout was back then.
Investors earn a return of over 6% with a dividend well covered by the company’s operating cash flow. In addition, thanks to its efforts to consolidate its balance sheet, its debt ratio is now around 1. This is a remarkable turnaround for a company which, just a few years ago, was forced to reduce. its dividend because it also has a lot of leverage.
Importantly for investors, this combination of a dividend well covered by cash flow and a healthier balance sheet makes this payout much more resilient than it was before. This gives good reason to believe that Kinder Morgan can maintain their payment into the future.
The grandfather of dividend producers
Best known for its Napa Auto Parts stores, Authentic pieces (NYSE: GPC) has a remarkable 65-year history of not only paying but also increasing its dividend payment each year. This remarkable story stems from the fact that the company’s operations are remarkably resistant to normal economic cycles.
After all, auto parts are a business that can perform well when the economy suffers. When all is well, people whose cars are starting to give them trouble may be willing to trade in that vehicle for a newer, presumably more reliable model. When the economy is tough, they are more likely to keep and repair their cars. Older cars often require more repair than newer ones, and this combination of “more likely to repair” and “older vehicles” helps Genuine Parts’ business to withstand tough times.
The yield on Genuine Parts is 2.6% more modest, but that yield is still higher than what even 30-year Treasuries are currently offering investors. Also consider that continued dividend growth is possible with the Genuine Parts dividend but not with most Treasuries, and the dividend starts to look even more attractive.
Genuine Parts has a debt ratio of around 1 and its dividends are well covered by its operating cash flow. This combination, along with the fact that it has increased that payout for more than six consecutive decades, should give investors good reason to believe that it will continue to support its dividend in the future.
A digital infrastructure company at the center of our online life
Although tech companies are rarely seen as revenue games, Cisco Systems (NASDAQ: CSCO) could very well be a worthy exception. Cisco has steadily increased its dividend since its inception a decade ago, and that payout now offers shareholders a solid return of 2.8%.
Cisco provides much of the Internet backbone that moves our online world and is constantly working with its partners to update this backbone for the future. It does this while showing a strong balance sheet with a debt-to-equity ratio of around 0.4. Also, his dividend only consumes about 60% of his earnings, allowing him to keep increasing that payout over time, as his profits do.
Analysts expect the company to grow about 5% to 6% annualized over the next five years, giving good reason to believe that its dividend growth can continue. Overall, the combination of a healthy balance sheet, a well-hedged dividend, and a modest growth trajectory over the next several years makes for a company to consider for income-seeking investors.
Making the most of a risky situation
While dividend stocks never offer guaranteed payouts, Kinder Morgan, Genuine Parts, and Cisco Systems all have features that make them worthy of consideration. Decent balance sheets, dividend payments well covered by profits or operating cash flow, and owners’ track records of rewarding their owners with dividends all play a role in this perspective.
If you’re a retiree looking for an income in this world of low interest rates, all three of them deserve a spot on your shortlist. However, if you want to receive their dividends, you must be a shareholder before their next ex-dividend date and hold until that date. Start your investigation now and increase your chances of quickly starting the portfolio income you are looking for to support your retirement.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.