Most retirement investors are focused on dividend stocks and interest for reliable income to carry them through retirement. It’s a time-tested strategy that, in combination with a long-term diversified portfolio, provides a lot of comfort.
The dividend stocks and bonds strategy, however, has been more difficult to execute lately because bond yields cratered and inflation has remained steady (some say inflation is even higher than actually reported). This has resulted in conservative investors pushing further out into the risk curve.
That means they are investing in a higher concentration of dividend stocks than they might normally feel good about if bond yields were at their traditional levels. So they need dividend stocks that are safe, but also offer generous yields.
There aren’t many dividend stocks that fit the bill, but there are enough to mine for consideration.
High-Yield Dividend Stocks: AT&T (T)
Dividend Yield: 5.62%
AT&T (T) remains the go-to stock in this arena, and I can’t say I blame investors for sticking with it. While the company’s organic growth has been non-existent, the recent purchase of DirecTV did give the combined entity some juice: There are synergies to be had, and cross-promotion of product that should lead to some modest growth over the next few years.
But growth isn’t that important for AT&T at this stage of its life. The new entity has free cash flow of something like $14 billion annually, with about $9 billion of that paid as a 5.62% dividend. I think that dividend is going to be stable for some time to come.
More to the point, AT&T carries very little long-term risk for precisely this purpose. There will always be buying demand for that dividend. The stock itself has been in a trading range for seven years, so there’s little risk of capital loss.
High-Yield Dividend Stocks: HCP, Inc. (HCP)
Dividend Yield: 6.42%
HCP, Inc. (HCP) is a hybrid real estate investment trust that I like quite a bit. On the one hand, it invests in healthcare properties, like senior housing, life science, medical offices and hospitals. As we know, there is no shortage of demand for healthcare and that is not going to change, possibly ever. All those healthcare providers have to work somewhere, so that means tons of real estate devoted to the sector.
It also means that, thanks to demand, rents should always be paid and there won’t be much vacancy.
On the other hand, HCP also invests in senior and mezzanine debt for healthcare properties. That allows the company to draw down debt at a low rate, and reinvest it in higher-yielding senior debt and very attractive returns on mezzanine debt.
Since the properties secured by that debt should also have robust cash flow, HCP wins as well, to the tune of a 6%-plus yield.
High-Yield Dividend Stocks: R.R. Donnelley & Sons (RRD)
Dividend Yield: 6.44%
R.R. Donnelley & Sons (RRD) is the perfect boring, high-yield stock that I would hold were I retired. Nobody pays much attention to the company because it isn’t sexy. It remains one of big kahunas in publishing and retail services — meaning magazines, catalogs, inserts, direct mail, office products, statement printing — all the things nobody pays attention to as a business, but which remains pervasive in our lives.
It doesn’t appear to make a ton of net income, but that’s because it takes a half-billion-dollar depreciation expense every year. That’s non-cash. So it generates a reliable half-billion dollars in free cash flow every year, and only distributes about $200 million of it in dividends. That translates to a yield of 6.6%.
Like AT&T, Donnelley has been in a trading range since 2010, but I think the cash flow remains reliable, and therefore the dividend looks like a safe bet.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
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