The 10 Best Stocks to Own for Retirement

March 2021 Edition

The stocks on this list offer an average yield in excess of 4%, have high Dividend Safety Scores, are less volatile than the broader market, outperformed during the last recession, and have increased their dividends for at least 5 straight years.

In other words, these are appealing companies to consider owning in a retirement portfolio designed to generate safe, growing dividend income and preserve capital…

Stock #1: Duke Energy (DUK)

Stock #1: Duke Energy (DUK)
Dividend Yield: 4.1%   Forward P/E Ratio: 18.4 (as of 2/7/21)
Sector: Utilities   Industry: Electric Utility
Dividend Growth Streak: 17 Years

Duke Energy is one of the best high dividend stocks for income-seeking investors, and it’s no wonder why. The company has paid uninterrupted quarterly dividends for 90 years and increased its dividend for the 17th consecutive year in 2020.

Duke Energy’s history dates back to the early 1900’s, and the company is the largest electric utility in the country today with over $23 billion in annual revenue and operations reaching across the Southeast and Midwest regions of the US. Duke Energy is a regulated utility company that serves approximately 7.7 million electric customers and 1.6 million gas customers.

Business Analysis
Regulated utility companies are essentially monopolies in the regions they operate in. With the exception of Ohio, all of Duke’s electric utilities operate as sole suppliers within their service territories. Building and operating the power plants, transmission lines, and distribution networks to supply customers with power costs billions of dollars, and it would generally be unprofitable and inefficient to have more than one supplier for a region.

The downside to the “monopoly” enjoyed by regulated utilities is that their services are priced by state commissions. This is done to keep prices fair for consumers and allow utility companies to earn a reasonable, but not excessive, return on their investments to encourage them to provide safe and reliable service. Some states have more generous regulators than others.

Overall, Duke Energy has a strong moat. The company has excellent scale as the largest electric utility in the country and operates primarily in regions with generally favorable demographic trends and regulatory frameworks. The non-discretionary nature of utility services also provides stable and predictable earnings throughout the course of an economic cycle.

Management has simplified Duke’s mix to focus on core regulated businesses that provide reliable earnings and new growth opportunities in natural gas and renewable generation resources. While the utility sector is gradually evolving, Duke Energy is here to stay.

Key Risks
Uncontrollable macro factors such as mild temperatures and industrial activity can impact Duke Energy’s near-term financial results. However, we believe these are transitory issues that have little bearing on the company’s long-term earnings potential.

The bigger risks worth monitoring are changes in state regulations, population growth trends in key states, increased environmental regulations, and execution of the company’s business strategy (e.g. large projects and acquisitions). For now, none of these look like concerns.

Over the very long term, electric utility companies will also need to deal with the reality that demand is gradually decaying thanks to increasing energy efficiency and distributed generation (e.g. rooftop solar). Duke is investing in commercial renewables, but they are a relatively small proportion of the overall business. The company’s 2015 acquisition of gas utility Piedmont should also help the company with growth initiatives outside of electric utility services.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics (learn about the 10 most important financial ratios for dividend investing here). Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Duke Energy’s Dividend Safety Score is 80, which indicates that the company’s dividend payment appears to be very safe.

Duke Energy’s strong Dividend Safety Score is driven by the company’s resilient business, reasonable payout ratio, stable earnings low payout ratios, and excellent credit rating. While Duke Energy’s payout ratio sits near 75%, which is high for some types of companies, it’s not a big concern here because of the company’s stability.

Utility companies hold up relatively well during economic recessions, and Duke Energy’s sales fell just 4% in 2009. While customers use somewhat less electricity during periods of weak economic growth, they still need to keep the lights on. DUK’s stock also fared well in 2008 and outperformed the S&P 500 by 15%. Management also raised the dividend.

As we mentioned earlier, regulated utility companies earn very stable earnings as well. As a state-regulated monopoly company selling non-discretionary services, Duke Energy’s earnings have been very stable for many years, providing further support for the dividend.

With that said, the capital-intensive nature of utility companies makes them heavily dependent on debt to run their businesses. However, Duke Energy maintains a healthy A- credit rating with Standard & Poor’s, positioning it well to continue financing its growth projects and dividend.

Duke Energy has been paying dividends for more than 90 years, and its payment should remain safe for many years to come.

Dividend Growth Analysis
While regulations generally protect a utility company’s earnings and market share, they also limit growth opportunities. As a result, most utility businesses have below-average dividend growth rates, and Duke Energy has been no exception.

Duke Energy has made regular quarterly dividend payments since the 1920s and last raised its dividend by 2.1% in July 2019. The company’s dividend has grown by 2% per year for most of the last decade, and management expects that pace to continue. Note that the drop in dividends paid in 2007 was due to the company’s spinoff of Spectra Energy into a stand-alone entity.

Going forward, management expects to double the company’s historical long-term dividend’s growth rate to 4% per year to better reflect an improvement in Duke’s lower risk business mix and core earnings growth rate of 4-6% per year.

Stock #2: Verizon Communications

Stock #2: Verizon Communications (VZ)
Dividend Yield: 4.5%   Forward P/E Ratio: 10.9 (as of 2/7/21)
Sector: Telecom   Industry: Diversified Communications Services
Dividend Growth Streak: 14 Years

While Warren Buffett has exited most of his Verizon stake in his dividend stock portfolio, the company remains a popular holding for many retired investors who value safe income and capital preservation. The company has paid dividends for more than 30 years and has raised its payout for over 10 consecutive years – the sign of a durable company.

Verizon is the largest wireless service provider in the United States, and the company’s 4G LTE network is available to over 98% of the country’s population. Wireless operations account for about 70% of Verizon’s total revenue but generate nearly all of its profits.

Wireline operations, such as traditional voice services and broadband video and data, account for 23% of Verizon’s revenue. Media (6% of total sales – AOL, Yahoo, mobile content, digital advertising) and telematics (1% – internet of things) are relatively small parts of the business and are unprofitable.

Overall, Verizon maintains more than 118 million wireless retail connections, 6.0 million Fios internet subscribers, and 4.5 million Fios video subscribers.

Business Analysis
Maintaining a quality wireless network across the country costs a lot of money. Verizon invested more than $18 billion in capital and spectrum licenses during 2020 to increase the future capacity of its wireless network and enhance its fiber network.

Thanks to its investments, the company has remained at the top of Root Metrics’ rankings of wireless reliability, speed, and network performance for each of the last five years. With its 4G LTE network covering over 98% of the U.S. population, Verizon’s reputation for quality and valuable brand help it maintain a large share of the market.

The company began conducting trials of 5G wireless technology during 2016 and will continue working hard to maintain its edge over competitors when it comes to moving to the next generation network architecture. As long as Verizon continues to invest in leading network coverage and architecture, the company should continue enjoying a huge base of customers.

New entrants will have an extremely hard time challenging Verizon or any of the other major telecom players because they lack the capital, spectrum, subscriber base, and brand recognition needed to effectively compete.

In addition to the industry’s high barriers to entry, the wireless communications market is appealing because its services are non-discretionary in nature. For example, Verizon’s churn rate (i.e. the percentage of customers who leave) in its wireless business averages about 1%. The majority of the company’s revenue is also recurring because consumers and businesses have a continuous need to communicate and use data.

Key Risks
The biggest uncertainty facing Verizon is future growth in wireless. Subscriber growth has largely plateaued as smartphone penetration has already tripled since 2010.

Sprint and T-Mobile have also improved the coverage and quality of their networks while becoming more aggressive with their pricing plans, narrowing the network quality advantages enjoyed by Verizon. There are also rumors that Sprint could merge with a major cable operator, which would make for an even more intense competitive environment.

It’s hard to say what will drive the next wave of wireless growth. Internet of Things, video, and virtual reality are all candidates, but it’s difficult to forecast when they could start moving the needle.

If growth in the wireless market remains sluggish or deteriorates, the battle between incumbents for existing subscribers could intensify and pressure the industry’s margins.

Verizon has been on the hunt for new areas of growth, investing in content and mobile advertising platforms. While Verizon is certainly not betting the house on these markets, they still present some strategic and financial risk given the company’s lack of expertise in these areas. There’s also risk that management pursues a large acquisition that ultimately backfires.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Verizon’s Dividend Safety Score is 87, which indicates that the company’s dividend payment appears to be very safe.

Verizon’s dividend is first supported by its healthy payout ratio, which is expected to be near 50% over the next year (i.e. for every dollar of earnings that Verizon earns, it will be paying out about 50 cents as a dividend).

This is a reasonable payout ratio for a steady firm such as Verizon. The company’s sales barely dipped during the financial crisis, and Verizon’s free cash flow per share actually grew each year. Businesses and consumers need Verizon’s wireless services regardless of how the economy is doing.

Another important factor to monitor when assessing dividend safety is a company’s balance sheet. Verizon took on substantial debt when it acquired Vodafone’s interest in Verizon Wireless in 2014. However, the firm has an objective of reducing its debt to eventually return to its pre-Vodafone transaction credit rating profile over the coming years. The new tax bill is expected to free up several billions of dollars that will be used to reduce Verizon’s debt as well.

Each of the major credit agencies has issued a “stable” outlook for the company, and I am not overly concerned about Verizon’s financial leverage given the predictable cash flow it generates.

Overall, Verizon’s dividend looks safe today. The company maintains healthy payout ratios, consistently generates free cash flow, provides non-discretionary services, and has demonstrated a commitment to paying and growing its dividend over the years.

The main risk is if management decides to pursue a large acquisition for growth and needs to restore the balance sheet as a result. In that scenario, which seems extremely unlikely based on management’s recent comments, the dividend could be reduced in order to free up cash.

Dividend Growth Analysis
Including Verizon’s history trading as Bell Atlantic prior to 2000, the company has paid uninterrupted dividends since 1984 and increased its dividend all but seven years since then.

While Verizon’s dividend has been consistent, growth has been slow. Verizon’s last dividend increase was a 2% raise in September 2020, and the company’s dividend has compounded by 2% per year over the last five years.

Looking ahead, Verizon’s dividend growth will likely remain between 2% and 3% per year, tracking the company’s underlying earnings growth.

Stock #3: Enterprise Products and Partners (EPD)

Stock #3: Enterprise Products and Partners LP (EPD)
Dividend Yield: 8.6%   Forward P/E Ratio: 7.5 (as of 2/7/21)
Sector: Energy   Industry: Oil and Gas Storage and Transportation
Dividend Growth Streak: 21 Years

Enterprise Products Partners is one of the largest midstream master limited partnerships in America, with about 50,000 miles of pipelines transporting natural gas, natural gas liquids, crude oil, refined products, and petrochemical. The firm also owns a number of storage facilities, processing plants, and terminals.

Enterprise’s infrastructure assets essentially help move different types of energy and fuel from one location to another for energy producers. The partnership makes most of its money from fees it charges customers for its transportation and storage services.

Business Analysis
The pipeline business has many attractive qualities. They can cost billions of dollars to build, take years to complete, and face regulatory compliance hurdles, resulting in high barriers to entry. Only so many pipelines are needed in any given area, and operators much have direct connections with energy producers. Demand tends to be stable for the products they move as well.

Thanks to these qualities, Enterprise has paid uninterrupted distributions since going public in 1998. Management has always run the business conservatively as well. The MLP eliminated half of the partnership’s incentive distribution rights in 2002, then fully in 2011 to keep its cost of capital low.

Enterprise was also one of the first MLP’s to move to a self-funded business model to reduce its dependence on capital markets. The firm completed this shift in 2018. Combined with a disciplined approach to debt, Enterprise is positioned to endure a wide range of environments.

Key Risks
Given Enterprise’s conservative use of debt, self-funded business model, and commodity-insensitive cash flow, it’s hard to identify many company-specific risks.

Perhaps the biggest risk factor to be aware of is one that could affect all midstream companies. The long-term growth story for Enterprise and others is tied to the U.S. shale industry. The global energy price environment needs to support solid oil & gas production growth in America.

Should domestic production growth fail to hit the optimistic forecasts many analysts have made for the decade ahead, Enterprise and others may not be able to continue finding profitable projects to invest in. Should energy production fall and remain depressed for a prolonged period of time, the need for pipelines could theoretically decline and dent the economics of Enterprise’s growth projects.

Investors should note that Enterprise’s stock price is also often correlated to crude prices, despite its cash flow not being directly tied to commodity prices. In other words, while investors may be drawn to Enterprise’s stable operations, its stock can be much more volatile than other fundamentally sound businesses like regulated utilities.

With oil prices tanking last year, some investors are also concerned that Enterprise’s customers may default on their contracts. It’s hard to say how this could play out, but Enterprise has disclosed that of the revenue generated by its top 200 customers (96% of the firm’s total revenue), 79% is from customers with an investment grade credit rating or backed by a letter of credit. We will continue monitoring the situation.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Enterprise’s Dividend Safety Score is 65, which indicates that the company’s distribution payment appears to be secure.

Enterprise’s solid Dividend Safety Score is driven by the company’s reasonable payout ratio, stable long-term business results, and conservative capital structure.

Unlike corporations, MLPs report a supplement measure known as “distributable cash flow” (DCF) in place of net income to get a better sense of their true dividend payout ratios. DCF can be thought of like free cash flow for an MLP.

Based on DCF estimates for next year, Enterprise’s projected DCF payout ratio is about 65%. This level is relatively low for MLPs and allows Enterprise to fund its growth using retained cash flow and debt, rather than issuing equity. This keeps the firm’s cost of capital low and makes its growth plans completely independent of EPD’s stock price.

Management has taken a conservative approach to debt as well. Enterprise boasts a BBB+ credit rating, which is tied for the highest in its industry. This helps the firm borrow at relatively low costs. Enterprise targets a long-term leverage ratio of 3.5 times which, combined with its healthy payout ratio, should ensure a safe distribution for years to come.

Dividend Growth Analysis
Enterprise Products Partners has raised its distribution for 21 consecutive years, recording 4% annual growth over the last five years. However, investors should note that management slowed the firm’s pace of income growth to a low single-digit pace in recent years.

This helped Enterprise reach its self-funding goal faster and also provides flexibility to return capital to shareholders through buybacks. Enterprise last raised its distribution by 1% in January 2021.

Stock #4: Healthcare Trust of America (HTA)

Stock #4: Healthcare Trust of America (HTA)
Dividend Yield: 4.4%   Forward P/E Ratio: 20.5 (as of 2/7/21)
Sector: Real Estate   Industry: Health Care REITs
Dividend Growth Streak: 7 Years

Founded in 2006, Healthcare Trust of America is the largest dedicated owner and operator of medical office buildings in the U.S. The REIT owns more than 23 million square feet of properties that are used by healthcare systems, academic medical centers, and physician groups to provide healthcare services.

Approximately 67% of its portfolio is located on the campuses of nationally or regionally recognized healthcare systems, which helps create more demand from medical practices for its properties. Major healthcare systems often possess high credit quality, allowing them to more easily invest capital into maintaining and expanding their campuses.

Business Analysis
Many healthcare companies are among the best recession proof dividend stocks due to the defensive nature of the industry during economic downturns. Specifically, people still need treatment for their various illnesses and injuries.

However, healthcare is a relatively fast-growing space as well. Thanks to an aging population and an increasing number of insured individuals, U.S. healthcare expenditures have an expected average growth rate of nearly 6% between 2018 and 2026.

Healthcare Trust of America should benefit from this development as demand for medical office buildings grows. The company maintains a solid investment grade credit rating which provides it with affordable capital it can use to consolidate the fragmented industry in the years ahead. Just 30% of medical office buildings are owned by public REITs and private equity firms, suggesting there is plenty of room for profitable growth.

Finally, management has done a nice job constructing a stable portfolio of tenants. No tenant accounts for more than 5% of rent, nor does any city account for more than 13% of the firm’s total square footage. Over 60% of annual base rent is derived from credit-rated tenants (mostly health systems), and most of the remaining rent comes from physician groups that are credit-worthy based on HTA’s internal underwriting.

Key Risks
The healthcare industry is heavily regulated. Many of Healthcare Trust of America’s tenants derive some of their revenue from Medicare and Medicaid. Should physician reimbursement rates come under pressure, or the Affordable Care Act be amended or even repealed, some of the firm’s tenants could be adversely affected. Fortunately, their relatively high rent coverage ratios (currently over 8x for physicians) suggest this risk is unlikely to threaten their ability to meet their obligations to Healthcare Trust of America.

As a REIT, HTA is required by law to pay out at least 90% of its taxable income as dividends. Therefore, the company is reliant on issuing equity and debt to fund its growth investments. As a relatively young REIT, the firm seems likely to continue prioritizing significant property acquisitions. Fortunately, Healthcare Trust of America has a strong balance sheet, reasonable debt maturities, and excellent liquidity.

Finally, the coronavirus pandemic creates some uncertainty for HTA’s tenants. Hospitals make most of their money on elective procedures which have been deferred to keep beds available for a potential surge in COVID-19 patients.

HTA collected 98% of monthly rents in Q2 but investors need to keep an eye on this situation.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Healthcare Trust of America has a Dividend Safety Score of 55, indicating that its dividend appears to be on solid ground.

The REIT’s dividend safety is supported by its adjusted funds from operations payout ratio which sits near 90%. Given the firm’s high-quality tenants, strong rent coverage ratios, and defensive cash flow stream, that’s a reasonable level.

Management also prioritizes maintaining low financial leverage. The company enjoys a “BBB” credit rating, has limited near term debt maturities, and maintains over $1 billion in liquidity. Simply put, Healthcare Trust of America has positioned its business conservatively to help ensure its dividend remains safe.

Dividend Growth Analysis

Healthcare Trust of America went public in 2012 and has increased its dividend each year since. The REIT’s pace of dividend growth has been slow, averaging around 1% per year, as it directed most of its capital towards property acquisitions and desired to maintain a conservative balance sheet and payout ratio.

Looking ahead, Healthcare Trust of America’s dividend will likely continue growing at a low single-digit rate, matching growth in its underlying cash flow.

Stock #5: TELUS Corporation

Stock #5: TELUS Corporation (TU)
Dividend Yield: 4.5%   Forward P/E Ratio: 24.2 (as of 2/7/21)
Sector: Telecom   Industry: Diversified Communications Services
Dividend Growth Streak: 16 Years

TELUS was founded in 1993 and is one of Canada’s largest telecom provides with about one-third of the national wireless market and over 40% of the internet market. Both of these business lines are quite stable, making Telus a reliable investment for investors living off dividends in retirement.

The company’s wireless segment accounted for about 65% of segment-level EBITDA last year with wireline operations generating the remaining 35%. Telus’s internet and cable TV businesses are growing the fastest, while its legacy phone business (about 10% of sales) is in secular decline.

Business Analysis
Telus became Canada’s top wireless company all the way back in 2000 when it acquired Clearnet Communications for $6.6 billion. The deal broadened the company’s range of bundled services while transforming it from a regional phone company to a blossoming national wireless business. Telus later embarked on a long-term restructuring plan, shifting away from its legacy phone business and towards faster-growing and more profitable wireless, internet, and pay TV businesses.

The company’s investments into its wireless network in particular have allowed it to consistently win market share and generate dependable subscriber growth over the years. The high quality of its network also results in pricing power to steadily increase its average revenue per user with the best customer retention of any Canadian telecom.

Key Risks
The U.S. telecom market has faced a bout of volatility over the past year as competition intensified. There have been concerns in the past that Canada’s favorable telecom industry could face similar disruption.

In fact, the Canadian Radio-Television and Telecommunications Commission has expressed concern that the three dominant telecoms controlling over 90% of the wireless market were threatening competition. As a result, the commission has been cracking down on what it considers oligopolistic practices.

Besides regulatory challenges, a new competitor could enter the marketplace altogether. Cable operator Shaw Communications (SJR) actually acquired spectrum-rich Wind Mobile for $1.6 billion in March 2016, marking its entry into the wireless market in an effort to better compete with Telus’ bundled services (Shaw can now offer television, wireless, and internet in major urban areas such as Ontario, Alberta, and British Columbia).

However, I would be surprised if the industry’s dynamics are hurt anytime soon. Wind Mobile is far behind Telus and the other major players with its network quality and coverage, for example. Telus is also enjoying nice growth from its internet and cable TV operations.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Telus has a Dividend Safety Score of 72, indicating that its dividend appears to be safe.

The firm’s Dividend Safety Score partially reflects Telus’s performance during the financial crisis when it continued growing its payout, courtesy of its stable revenue and earnings (most consumers and businesses need telecom services even when economic times are tough).

The predictability of Telus’ business has allowed the company to safely maintain an EPS payout ratio between 55% and 75% most years since the financial crisis as well. While Telus has a relatively high debt load, management expects to decrease the company’s leverage in the coming years as its long-term investments pay off and increase profitability.

Telus still maintains an investment-grade credit rating today, and its growing base of largely recurring cash flows means it should be sufficient to service its existing debt.

Dividend Growth Analysis
Telus has increased its dividend consecutively every year since 2004 making it a (learn about the Dividend Achievers here). Annual dividend growth has averaged more than 8% over the last five years.

The company has a target to increase dividends by 7% to 10% annually through 2022 while maintaining a payout ratio between 65% and 75%. Management hopes to continue meeting their dividend growth guidance despite the pandemic.

Investors should note that, as a Canadian company, Telus’s stock has a 15% withholding tax on the dividend. Tax treaties between the U.S. and Canada allow you to potentially recoup this withholding, but it can be a complicated and lengthy amount of paperwork at tax time.

Additionally, Telus pays its entire dividend in Canadian dollars, which means that the amount of money that will actually appear in your bank account can be far more volatile than the company’s steadily-growing dividend would indicate depending on what the USD-CAD currency exchange rate is at the time.

Stock #6: AT&T

Stock #6: AT&T (T)
Dividend Yield: 7.2%   Forward P/E Ratio: 9.2 (as of 2/7/21)
Sector: Telecom   Industry: Diversified Communications Services
Dividend Growth Streak: 36 Years

Following its 2015 acquisition of DirecTV and planned takeover of Time Warner (TWX), AT&T is a leading provider of communications and digital entertainment services around the world.

The company primarily provides wireless voice and data services, pay-TV services, and broadband internet services to millions of people and businesses across North America. No other telecom business has ever had as many subscribers across each service line as AT&T does now.

AT&T is a particularly popular stock for retirement because it is a member of the S&P Dividend Aristocrats Index, S&P 500 companies that have raised their dividends for at least 25 consecutive years. Investors can view data and analysis on all of the dividend aristocrats here.

Business Analysis
Most of AT&T’s markets are characterized by very high barriers to entry and are dominated by just a handful of companies selling nondiscretionary services, resulting in fairly predictable earnings. Imagine trying to launch a competing wireless network, for example. Not a single rational consumer would sign up for your wireless voice and data service if you couldn’t offer them nationwide coverage, which requires billions of dollars to be invested in spectrum and network infrastructure alone.

Prior to acquiring DirecTV, roughly 75% of AT&T’s earnings were generated from its wireless operations. Purchasing DirecTV made AT&T the largest pay-TV provider in the world and launched the company down a path focused on cost synergies and bundling services to drive earnings higher. In a mature market such as pay-TV, it can make sense to acquire more subscribers and cut out costs.

As the largest integrated communications company in the world, AT&T sees a number of opportunities to bundle its phone, TV, and broadband services. Bundles can be more price-effective for consumers while also raising switching costs. AT&T has noted that approximately 15 million DirecTV customers currently do not use its wireless products, and more than 20 million of its wireless customers do not have DirecTV.

With a world-class distribution system in place, AT&T’s next chess move was to acquire Time Warner. This deal, which is waiting for final regulatory approval, would give the company leading content it can run through its distribution, saving costs and providing more value for consumers. Over 100 million customers subscribe to AT&T’s TV, mobile, and broadband services, which allows the company to offer bundled subscription packages that can hopefully be even further differentiated with the increased content flexibility provided by Time Warner.

While some of AT&T’s largest businesses are struggling to achieve meaningful new subscriber growth, the company’s sheer size and economies of scale make it a force to be reckoned with. AT&T’s acquisitions also provide a number of cost synergy opportunities to help it grow earnings even if revenue growth remains sluggish.

Key Risks

Major acquisitions come with great risk. AT&T has taken two large bites recently with its DirecTV and Time Warner acquisitions, and the success of these deals is incredibly important to AT&T’s future. DirecTV and Time Warner are both facing their own unique sets of disruptive challenges, too.

For example, AT&T lost around half a million pay-TV customers in the third quarter of 2020 due to cord-cutting (customers are migrating to over-the-top streaming services). The firm’s streaming DirecTV Now service also lost subscribers as it rationalized pricing to improve margins. As a result, investors continue to worry about the future of AT&T’s pay-TV operations. For perspective, however, the Entertainment division which houses AT&T’s satellite TV business accounts for roughly 15% of total EBITDA.

If industry conditions take an unexpected turn away from the direction AT&T has bet on in a big way or management becomes distracted (two very different cultures and businesses are combining), then the company’s debt burden and refinancing risk could become a big deal within the next 5-10 years.

Delivering on its expected revenue and cost synergies from these acquisitions poses the greatest risk and opportunity for AT&T, which is doing all it can to squeeze profit growth out of its mature markets.

Investors also need to watch how the coronavirus pandemic impacts the performance of AT&T’s media and entertainment assets, which depend more on cyclical advertising revenue. It’s important that the company’s free cash flow generation remain solid to help with deleveraging.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

AT&T has a Dividend Safety Score of 65, indicating that its dividend appears to remain on solid ground following the close of its Time Warner acquisition, which added significantly to the firm’s debt. Investors can learn more about how the deal affect’s AT&T’s dividend safety here.

AT&T’s dividend security begins with its payout ratio. The company’s dividend has consumed approximately 65% of its adjusted earnings over the last year, and management expects the firm’s free cash flow after paying dividends to cover AT&T’s debt maturities over the next three years. As that plays out, AT&T expects to return its leverage to historical levels within several years. There’s not much margin for error, but AT&T’s earnings stream is very sticky.

Speaking of business stability, AT&T performed well during the 2007-09 recession. The company’s sales edged down just 1% in fiscal year 2009, and AT&T’s free cash flow per share actually grew from $2.35 in 2008 to $3.01 in 2009. Consumers and businesses continued to rely on AT&T’s internet, wireless, video, and data services during the economic downturn. The rise of smartphones didn’t hurt either.

Another factor supporting AT&T’s dividend is the company’s excellent free cash flow generation. Without free cash flow, companies cannot sustainably pay dividends unless they issue debt or equity. AT&T has generated positive free cash flow for more than a decade. Maintaining communications networks is extremely capital intensive, but AT&T’s subscriber base is so large and sticky that it more than covers the company’s capital spending requirements each year.

The main knock against AT&T’s dividend is the company’s high financial leverage, which is a result of AT&T’s capital-intensive business model and the extra debt the firm is taking on to buy Time Warner. The company still maintains a “BBB” credit rating with S&P, but investors need to watch its debt burden and refinancing risk over the next several years, especially as the firm bids on spectrum needed for its 5G network.

However, for the time being, AT&T should have the free cash flow and the credit rating to continue paying its generous dividend while meeting its other financial obligations, especially as the world remains awash in relatively low interest rates.

Overall, AT&T’s non-discretionary services, excellent free cash flow generation, and reasonable payout ratio all support the company’s ability to continue paying down its high debt load while continuing to make dividend payments over the coming years.

Dividend Growth Analysis

AT&T has increased its quarterly dividend for 36 consecutive years, with low single-digit growth over the past decade. However, in December 2020 management announced plans to keep the dividend frozen in 2021 to prioritize debt reduction. AT&T’s dividend growth streak will end if it does not raise its payout by the end of 2021.

Looking further out, I expect dividend growth to remain between 1% and 2% per year. AT&T expects its dividend payout ratio to sit in the 60s as a percentage of free cash flow this year. In other words, there is little room for the dividend to grow faster than the company’s growth in underlying free cash flow given deleveraging needs.

With a number of technological changes gradually impacting AT&T’s markets (e.g. pay-TV and wireless) and debt reduction a top priority assuming the Time Warner acquisition gains approval, it’s hard to imagine a company of this size growing much faster than a couple of percentage points per year. Dividend growth will follow a similar path.

Stock #7: W.P. Carey

Stock #7: W.P. Carey (WPC)
Dividend Yield: 6.2%   Forward P/E Ratio: 14.0 (as of 2/7/21)
Sector: Real Estate   Industry: Diversified REITs
Dividend Growth Streak: 21 Years

Founded in 1973, W.P. Carey is a triple net lease REIT that owns over 1,200 properties located in 19 countries around the world. W.P. Carey’s portfolio is broadly diversified across tenants (over 200, none greater than 6% of rent), industries (29), property types (industrial, office, retail, storage), and geographies (35% of sales are outside of the U.S., primarily in Western and Northern Europe).

The REIT also manages more than $10 billion in non-traded REITs under its asset management business. Management fees represent close to 20% of W.P. Carey’s adjusted funds from operations (AFFO). However, the company is gradually shutting down this division to focus on its core triple net lease operations.

Business Analysis
W.P. Carey is far more diversified by property type and industry than most of its peers, which results in a steadier stream of cash flow over time. Importantly, management also had the foresight to exit most of its brick-and-mortar consumer retail businesses many years ago, before pressure from e-commerce intensified.

Simply put, management takes a disciplined approach to growth, which has earned the company an investment grade credit rating and helped W.P. Carey achieve an occupancy rate of at least 96% each year for more than a decade.

With an average lease term near 10 years and over 60% of its rent coming from leases linked to CPI, W.P. Carey also has a built-in hedge against inflation, a differentiating factor among net lease REITs.

Key Risks
W.P. Carey has done a nice job minimizing the risks it faces thanks to its healthy diversification and conservative capital allocation.

One risk is the company’s rate of long-term property growth. Historically, W.P. Carey has benefited from acquiring its managed non-traded portfolios (under its asset management business) at highly favorable terms.

With management deciding to focus exclusively on its owned triple net lease portfolio, the company’s business model will change. Fortunately, W.P. Carey’s long-term management track record is impressive, and CEO Jason Fox has been with the REIT for well over a decade. In that time, he’s been responsible for over $10 billion in acquisitions.

In other words, investors should remain confident in the REIT’s long-term growth, although it’s hard to say what the ultimate pace will be.

A shorter-term concern stems from the coronavirus, which has prompted many businesses to evaluate whether or not they will continue paying their rent. It’s too soon to say how big of an impact this could have on W.P. Carey’s fundamentals (96% of Q2 rents were collected). We believe the business is financially strong and are taking a wait-and-see approach.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

W.P. Carey has a Dividend Safety Score of 73, indicating that its dividend looks secure and unlikely to be cut in the future.

W.P. Carey has increased its dividend every year since going public in 1998. The company maintains a reasonable AFFO payout ratio near 85%, providing the dividend with some cushion in case cash flow were to fall.

The company’s long-term leases with high quality tenants make that scenario unlikely. W.P. Carey’s occupancy rate exceeds 98%, and no more than 6% of its leases expire through 2021. Impressively, 99% of its leases also have contractual rent increases.

With a highly stable and conservative payout ratio below the industry average, a relatively low cost of capital, a diversified property portfolio, and a strong balance sheet (the company has an investment grade credit rating), W.P. Carey seems like a reasonable bet for income and moderate growth in the years ahead.

Dividend Growth Analysis
W.P. Carey’s dividend has compounded by 2% annually over the last five years. The company’s payout growth has slowed more recently as management has found less profitable investment opportunities and opted to further improve WPC’s balance sheet.

Stock #8: Realty Income

Stock #8: Realty Income (O)
Dividend Yield: 4.6%   Forward P/E Ratio: 17.9 (as of 2/7/21)
Sector: Real Estate   Industry: Retail REITs
Dividend Growth Streak: 25 Years

Realty Income is known as “The Monthly Dividend Company” and is one of the best monthly dividend stocks in the market. The business has paid monthly dividends for more than 45 consecutive years and increased its dividend over 90 times since 1994.

Realty Income was founded in 1969 and is a real estate investment trust (REIT) with more than 6,000 properties located across 49 states. Almost all of the company’s properties are single-tenant and are leased to more than 600 different commercial tenants doing business in over 50 different industries (no industry is more than 12% of rent).

Business Analysis
Few companies have maintained as strong of a dividend growth track record as Realty Income. The company’s success is driven by its diversified portfolio, disciplined capital allocation, focused business strategy, and strong financial health. These factors have combined to create a resilient business.

The company leverages its relationships with tenants, property developers, brokers, investment banks, and other parties to source acquisition opportunities with strong initial cap rates and built-in rent growth. Realty Income will only purchase freestanding, single-tenant properties located in big markets and/or key locations that it can lease to tenants with superior credit ratings and cash flows.

The retail business is very much driven by location, and Realty Income’s portfolio clearly plays to this critical success factor. As a result of the company’s efforts and discipline, its occupancy rate has never dipped below 96.6% going all the way back to 1992. Sustained high occupancy rates signal the high quality locations of Realty Income’s properties and the financial strength of its tenants.

Overall, it’s hard not to like Realty Income’s business. The company owns thousands of extremely valuable retail locations; is diversified by tenant, industry, and geography; maintains a conservative capital structure; has plenty of opportunities for future growth; and has a long track record of creating value for shareholders.

Key Risks
Realty Income is significantly exposed to the consumer retail sector (83% of total rent), which is constantly evolving due to changing consumer preferences and the continued rise of e-commerce. However, Realty Income is not overly exposed to any single industry and derives the majority of its retail rent from tenants with business models that are less susceptible to online spending (e.g. dollar stores, services).

The coronavirus pandemic is arguably the biggest challenge Realty Income has faced. With many retailers forced to temporarily shut down, Realty Income collected only about 85% of its rent in the second quarter.

The REIT remains committed to its dividend but ultimately needs rent collection rates to improve as the economy reopens.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Realty Income has a Dividend Safety Score of 70, indicating that its dividend looks unlikely to be cut.

Realty Income’s solid Dividend Safety Score is driven by the company’s reasonable payout ratio, stable long-term business results, conservative capital structure, and diversified mix of rent revenue.

Unlike corporations, REITs report a supplement measure known as “adjusted funds from operation” (AFFO) in place of net income to get a better sense of their true dividend payout ratios. AFFO can be thought of like free cash flow for a REIT.

Based on AFFO estimates for next year, Realty Income’s projected AFFO payout ratio is about 80%. Despite the pandemic weighing on rent collection, analysts still expect Realty’s cash flow to cover its dividend.

Once the economy normalizes, the company’s long-term leases, consistently strong occupancy rates, quality real estate locations, industry diversification, and financially healthy tenants alleviate most of the concerns associated with a high payout ratio, which is standard for almost every REIT because of their unique tax structure.

Realty Income’s balance sheet represents another source of stability for the dividend. The company maintains an investment-grade credit rating from Standard & Poor’s and should have no difficulty continuing to access capital markets.

When combined with management’s clear commitment to the dividend, Realty Income seems likely to remain “The Monthly Dividend Company” for many months and years to come. Investors just need to keep an eye on rent collection rates to make sure they remain stable.

Dividend Growth Analysis
Despite management’s solid track record of paying and increasing dividends over the years, Realty Income’s dividend has only grown by 5% annually over the last 20 years and by 4% per year over the last five years.

Minimal dividend growth should be expected until retail trends improve, with low single-digit annual dividend growth potential thereafter.


Stock #9: Philip Morris International (PM)

Stock #9: Philip Morris International (PM)
Dividend Yield: 5.7%   Forward P/E Ratio: 14.1 (as of 2/7/21)
Sector: Consumer Staples  Industry: Tobacco
Dividend Growth Streak: 12 Years

Philip Morris spun off from Altria in 2008, with Altria serving the U.S. and Philip Morris owning the international rights to all of Altria’s most famous brands, most notably Marlboro (the No. 1 cigarette brand in the world). Philip Morris markets its cigarette brands to more than 150 million customers in over 180 countries and has close to 30% international market share (excluding China and the U.S.).

Geographically, the European Union (31% of sales, 36% of income) and Asia (35% of sales, 32% of income) are the company’s most important regions, followed by Eastern Europe, Middle East and Africa (24% of sales, 22% of income) and Latin American and Canada (10% of sales, 10% of income).

While traditional tobacco products still generate the vast majority of the company’s profits, reduced-risk products, or RRPs, now account for over 20% of sales and are growing rapidly.

Business Analysis
Philip Morris enjoys the No. 1 or No. 2 market share position in most of the countries it competes in. The firm’s dominance is driven by the strength of its brand portfolio, which also results in excellent pricing power thanks to its focus on the premium end of the market. Combined with the extremely low capital intensity of cigarette manufacturing, this business is the definition of a cash cow.

While cigarette consumption is in secular decline, the company has more than offset lower volumes with higher prices. Philip Morris has also been the most proactive company when it comes to investing for the future. Since 2008 the firm has invested over $7 billion in R&D, with the majority of that spending focused on smoke-free offerings. Management expects 38% to 42% of firm-wide revenue to come from smoke-free offerings by 2025 (up from nearly 20% in 2019), positioning Philip Morris as the global leader in cigarette alternatives.

Key Risks
The tobacco industry is in transition as more smokers seek alternative, lower-risk products. While Philip Morris appears to be a leader with its heat-not-burn IQOS tobacco product, the market remains dynamic. Shifting consumer tastes, a shrinking pool of smokers, and adverse regulatory changes present the biggest threats to Philip Morris’ business.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Philip Morris has a Dividend Safety Score of 64, indicating its dividend is on solid ground.

The tobacco industry generates very stable cash flow thanks to the addictive nature of its products and its capital-light nature. These factors allow Philip Morris to safely maintain a payout ratio above 80%.

Combined with the firm’s strong balance sheet (investment-grade credit rating), geographical diversification (not overly exposed to any country’s regulations or consumer trends), and leading investments in next-generation products, the company seems likely to continue paying reliable dividends for the foreseeable future.

Dividend Growth Analysis
Philip Morris has increased its payout each year since becoming an independent company in 2008, recording low to mid-single digit annual growth in recent years.

Stock #10: Magellan Midstream Partners

Stock #10: Magellan Midstream Partners, LP (MMP)
Dividend Yield: 10.1%   Forward P/E Ratio: 8.7 (as of 2/7/21)
Sector: Energy   Industry: Oil & Gas Production MLP
Dividend Growth Streak: 18 Years

Magellan Midstream Partners is a master limited partnership (MLP) engaged in the transportation, storage, and distribution of refined petroleum products (59% of operating profits) and crude oil (34%). It also has a marine storage business (7%). Unlike most MLPs, Magellan Midstream Partners has a simple organizational structure with no incentive distribution rights.

The company owns over 13,000 miles of refined products, crude oil, and ammonia pipelines, as well as more than 50 storage terminals. Magellan Midstream Partners is a critical player in the energy industry, linking sources of crude oil supply with refineries and ultimately with end users of petroleum products.

Business Analysis
When it comes to transporting petroleum products between different markets, pipelines are usually the most reliable, lowest cost, and safest option. Magellan Midstream Partners boasts the longest refined products pipeline system, giving it unique access to a large number of refiners. The company also enjoys profits that are driven by throughput volume and tariffs rather than commodity prices.

In fact, management expects future fee-based, low-risk activities to comprise at least 85% of the company’s total operating profit. Magellan Midstream Partners enjoys long-term contracts with fixed rates that guarantee the company a minimum level of volume and predictable cash flows. As long as the company’s customers can continue making payments and honor their long-term agreements, few business models are more stable than Magellan Midstream Partners’.

As low-cost U.S. shale oil production continues to grow over the coming years, the need for transportation and storage services will also rise. This should benefit the incumbents because they already have access to key shipping and refining hubs, as well as relationships with major players in the value chain. Furthermore, few companies can afford the massive cost required to construct pipelines, resulting in a fairly consolidated market.

Finally, it’s worth repeating that Magellan Midstream Partners has no incentive distribution rights, which means it does not have to give any of its distributable cash flow to a general partner. As a result, the company keeps more cash that it can reinvest and use for faster distribution growth. The lack of incentive distribution rights, combined with a BBB+ credit rating from S&P, also provides Magellan Midstream Partners with one of the lowest costs of capital in the sector, reducing financing risk and making growth projects all the more attractive.

Key Risks

The coronavirus pandemic has created unprecedented challenges for part of Magellan’s business given the fall in fuel consumption. However, the distribution is expected to remain covered by cash flow this year, and Magellan’s balance sheet and liquidity are solid.

Simply Safe Dividends analyzed these issues here

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety by reviewing its key financial metrics. Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. You can review how scores are calculated, see their real-time track record, and learn how to use them for your portfolio here.

Magellan Midstream Partners has a Dividend Safety Score of 61, which indicates that the partnership’s distribution looks safe for now.

Magellan Midstream Partners has historically paid one of the safest dividends in the MLP sector, as demonstrated by its 82% distributable cash flow payout ratio over the last 12 months. The company targets a distribution coverage ratio of at least 1.1 to 1.2 on a long-term basis, and management is very conservative with debt.

In fact, Magellan Midstream Partners has a long history of maintaining sector-leading credit metrics. With a relatively low level of debt and an investment-grade credit rating, the company does not depend on equity issuances, which can be quite expensive if investment sentiment sours, to fund its dividend or current growth projects. Magellan’s lack of incentive distribution rights also lowers its cost of capital since the company does not need to share its distributable cash flow.

Dividend Growth Analysis
Magellan Midstream Partners has rewarded investors with low double-digit annual distribution growth since the company’s initial public offering in 2001, raising its payout each year.

Management targeted 3% dividend growth in 2020 but the payout will remain flat for now. Coronavirus-related headwinds will weigh on distributable cash flow, but management believes distribution coverage will sit near 1.1x (lowest level in at least a decade).

— Brian Bollinger

Disclosure: Brian Bollinger is long DUK, VZ, T, WPC, and PM.