What to Look for in Retirement Stocks
With a huge market sell-off still in the rearview mirror, investors have been wondering whether 2019 will be a rough year for stocks. If you’re a retirement investor, you should be extra careful because, in a stock market crash, shares of even the most solid companies could be in the red.
So, how can an investor protect their retirement nest egg from wild swings in the markets?
Well, my suggestion is to turn your retirement nest egg into an income machine.
You see, when you have a portfolio of retirement stocks that can pay you dividends on a regular basis, it would make market volatility a lot more bearable.
Of course, not every dividend stock is a retirement stock. In order for a company to deserve a spot in a retirement portfolio, it needs to have the ability to pay dividends through thick and thin. The reason is simple: If you want to use dividend income to cover day-to-day expenses in retirement, you don’t want the companies in your portfolio to cut their dividends when a recession arrives.
Now, I believe that the U.S. economy has a positive long-term outlook. But history has shown that our economy always moves in cycles. Therefore, for investors who want to build a bullet-proof retirement portfolio, they should consider established dividend-paying companies in recession-proof industries.
Below are three dividend stocks worth considering for this particular reason.
List of Three Retirement Stocks
| Company Name | Stock Exchange | Ticker Symbol | Dividend Yield |
| Kimberly Clark Corp | NYSE | KMB | 3.5% |
| WP Carey Inc | NYSE | WPC | 6.1% |
| Consolidated Communications Holdings Inc | NASDAQ | CNSL | 13.8% |
1. Kimberly Clark Corp
To start off the list of retirement stocks is Kimberly Clark Corp (NYSE:KMB), a consumer products company headquartered in Dallas, Texas.
While the company’s name may not ring a bell, you will likely have seen and bought some of the its products. Kimberly Clark has many household brands, such as “Kleenex,” “Cottonelle,” “Scott,” and “Huggies.”
Compared to companies at the frontier of technology, Kimberly Clark is running a relatively boring business. But for retirement investors, this “boringness” is good because the company’s products never go out of style—people buy them through thick and thin.
Think about it. Whether the economy is booming or deep in the doldrums, people always buy toilet paper and paper towels. At the same time, parents always buy diapers for their babies (my son just started potty training, and I’m looking forward to saving a lot of money once he graduates).
Mind you, each of the four brands I mentioned above brings over $1.0 billion in sales for KMB annually.
In other words, Kimberly Clark runs a recession-proof business. Thanks to that, the company offers one of the most reliable dividend streams in the market.
Consider this: Kimberly Clark has been paying uninterrupted dividends for 81 years, and has raised its payout in each of the last 46 years. (Source: “Dividend/Split History,” Kimberly Clark Corp, last accessed January 9, 2019.)
When it comes to providing recession-proof income to retirees, things don’t get much better than this.
Business has been growing, too. From 2004 to 2017, Kimberly Clark’s organic sales increased at a compound annual growth rate (CAGR) of four percent. Bottom-line results were even more impressive as the company’s adjusted earnings per share achieved a CAGR of five percent during this period.
While Kimberly Clark is yet to release its full-year 2018 results, management expects the company to have earned an adjusted net income of between $6.60 and $6.80 per share for the year. That would represent a year-over-year increase of six to nine percent. (Source: “Kimberly-Clark Announces Third Quarter 2018 Results,” Kimberly Clark Corp, October 22, 2018.)
Notably, the amount would provide more than enough coverage for the $4.00-per-share dividend that the company declared during the year.
Trading at $114.95 apiece, KMB stock offers an annual yield of 3.5%.
2. WP Carey Inc
Moving up the yield ladder, we have WP Carey Inc (NYSE:WPC), a real estate investment trust (REIT) headquartered in New York City.
Many retirement investors are familiar with the real estate business. By being a landlord, an investor can collect a predictable stream of rental income.
REITs are just like landlords. They own properties, lease them out, and collect rental income from tenants. WP Carey happens to be one of the biggest REITs in today’s market. As of September 30, 2018, the company’s portfolio consisted of 1,186 properties totaling 133 million square feet. (Source: “W. P. Carey Investor Presentation 3Q18,” WP Carey Inc, last accessed January 9, 2019.)
The portfolio is well diversified. While the U.S. represents WP Carey’s largest exposure (representing 62.1% of its rental income), the company owns properties in countries around the world, including Canada (1.0%), Germany (7.1%), Poland (4.6%), Spain (4.6%), the U.K. (3.6%), and France (1.4%).
And unlike REITs that focus on just one type of real estate, WP Carey has exposure to multiple property types, including industrial buildings, warehouses, office buildings, retail properties, and self-storage locations.
Thanks to having a substantial portfolio of different types of properties, the company makes money from a large tenant base. WP Carey’s portfolio of properties are leased to 304 tenants in more than two dozen different industries.
Therefore, if one of the tenants has trouble paying rent, the impact on the REIT’s company-level financials will likely be limited.
Don’t forget, REITs are required by law to pay out most of their profits to shareholders through dividends. With a quarterly dividend rate of $1.03 per share, WPC stock offers a generous annual yield of 6.1%.
What’s more impressive is WP Carey’s ability to raise its payout. Since the company went public in 1998, management has increased the dividend every single year.
And despite making bigger cash payments to shareholders, WPC managed to improve its dividend safety. In 2013, the company was paying out 80% of its adjusted funds from operations (AFFO). In the first nine months of 2018, WPC’s AFFO payout ratio came in at 75%, leaving a wider margin of safety than before.
Based on WPC’s latest operating and financial results, the company is well positioned to continue its dividend increase record. By the end of September 2018, WP Carey’s portfolio was 98.7% leased, with a weighted average lease term of 10.2 years. (Source: “W. P. Carey Inc. Announces Third Quarter 2018 Financial Results,” WP Carey Inc, November 2, 2018.)
The best part is that most of the company’s lease agreements come with contractual rent escalators. This will allow the REIT to earn increasing rental income over time, which can, in turn, translate to increasing dividends. That’s why WPC could be a great retirement stock.
3. Consolidated Communications Holdings Inc
Now this is a good one.
With the average S&P 500 company paying just over two percent at the moment, the two companies we just looked at—KMB and WPC—can already be considered high-yield stocks.
But this third company—Consolidated Communications Holdings Inc (NASDAQ:CNSL)—is taking the concept of high yield to a whole other level.
Consolidated Communications is a broadband and business communications provider headquartered in Mattoon, Illinois. It pays quarterly dividends of almost $0.39 per share, giving CNSL stock a jaw-dropping yield of 13.8%.
Of course, we know that high-yield stocks are not exactly known for their dividend safety. And if you are a retirement investor, you certainly don’t want to put your money into a company before management cuts the dividend.
So before we go any further, let’s first check whether the company has enough resources to support its oversized dividend.
As it turns out, Consolidated Communications makes the analysis easier by reporting something called cash available to pay dividends (CAPD). It is calculated by taking adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), adding cash interest income, then subtracting cash interest expense, capital expenditures, and cash income taxes.
By comparing this metric to dividends paid during a given reporting period, investors can see whether the company earned enough cash to cover its payout.
According to its latest earnings report, Consolidated Communications generated $39.5 million in cash available to pay dividends while paying out $27.6 million in actual dividends in the third quarter of 2018. Therefore, the company achieved a payout ratio of 69.9%, leaving a margin for error. (Source: “Consolidated Communications Reports Third Quarter 2018 Results,” Consolidated Communications Holdings Inc., November 1, 2018.)
In the first three quarters of 2018, CNSL generated $123.0 million in cash available to pay dividends. Its actual dividend payments, on the other hand, totaled $82.6 million during this period. That translated to a payout ratio of 67.1%, so again, the payout remained safe.
Other than its well-covered double-digit dividend yield, another reason why CNSL could be a good retirement stock is the nature of its business.
With 37,000 fiber network miles, Consolidated Communications is one of the top 10 fiber providers in the country. It has 10,000 on-net buildings, 3,400 fiber connections for wireless providers, and 782,000 data and Internet connections.
Through this expansive network, CNSL provides data, voice, video, managed services, cloud computing, and wireless backhaul to a diverse customer base that includes carriers, commercial customers, and individual consumers. (Source: “Consolidated Communications Investor Presentation December 2018,” Consolidated Communications Holdings Inc, last accessed January 9, 2019.)
Fiber optic networks are expensive to build and hard to replace. Moreover, they are critical to today’s communications industry. Because CNSL has established a solid position in the market, its recurring business adds another layer of safety to its dividend policy.
Add that up and you’ll see that Consolidated Communications is one of the few double-digit yielders worth considering for retirement investors.