In today’s low-interest-rate environment, it’s virtually impossible for retirees to earn enough income from traditional sources such as bonds and CDs to cover their costs. That leads many to seek out riskier assets such as dividend-paying stocks for income from their portfolios. But there’s a major problem with that approach: Dividends are never guaranteed payments, and when a company cuts its dividend, its share price often drops, too.
As a result, when retirees are looking for income-producing stocks, they need to look beyond just the reported dividend yield and at the quality and supportability of that dividend. There are still no guarantees when it comes to dividends, but these three income stocks are perfect for retirees to consider when looking for potential income sources from their portfolios.
A pipeline giant that was once bitten and is now twice shy
Companies with a fairly recent history of a dividend cut may not seem like an ideal candidate for income-seeking investments, but pipeline giant Kinder Morgan (NYSE: KMI) may be an exception. In late 2015, Kinder Morgan was forced to cut its dividend not because its operations were suffering, but rather because it overleveraged its balance sheet after it bought out a sister pipeline company.
It used the money it freed up from that dividend cut to help shore up its balance sheet and has since begun restoring its payment to its shareholders. In fact, it just recently announced a 3% increase to its payout and now offers investors $0.27 a share per quarter. While that’s still below where the dividend sat before the 2015 cut, it’s a much more supportable dividend today than that higher payout was then.
Investors are getting a better than 6% yield from a dividend that’s well covered by the company’s operating cash flows. In addition, thanks to its efforts to clean up its balance sheet, its debt-to-equity ratio now sits at around 1. That’s a remarkable turnaround for a company that just a few years ago was forced to cut its dividend because it had too much leverage.
Importantly for investors, that combination of a dividend that’s well covered from cash flows and a healthier balance sheet makes that payment much more resilient than it used to be. That provides a good reason to believe that Kinder Morgan can maintain its payment well into the future.
The granddaddy of dividend growers
Best known for its Napa Auto Parts stores, Genuine Parts (NYSE: GPC) has a remarkable 65-year history of not only paying but also increasing its dividend payment each year. That remarkable history comes from the fact that the company’s business is remarkably resilient to normal economic cycles.
After all, car parts are a business that can do well when the economy suffers. When things are going well, people whose car begins giving them trouble may be willing to trade in that vehicle for a newer, presumably more reliable model. When the economy is tough, they’re more likely to keep and repair their cars. Older cars often require more repairs than newer ones do, and that combination of “more likely to repair” and “older vehicles” helps Genuine Parts’ business hold up in tough times.
Genuine Parts’ yield is a more modest 2.6%, but that yield is still stronger than what even 30-year Treasury bonds are currently offering investors. Also consider that continued dividend growth is possible with Genuine Parts’ dividend but not with most Treasury bonds, and the dividend starts to look even more attractive.
Genuine Parts sports a debt-to-equity ratio of around 1, and its dividends are well covered by its operating cash flows. That combination, along with the fact that it has increased that payment for over six consecutive decades, should give investors good reason to believe it will continue to support its dividend in the future.
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