Each month, Daily Trade Alert and Simply Safe Dividends team up to offer The 10 Best Stocks to Own for Retirement. The idea is to identify appealing stocks for retired folks, that offer:

  • Average yields above 4%
  • Solid dividend safety
  • Low volatility
  • Records of annual dividend increases > 5 years running

Here is the most recent list, in alphabetical order. The data was sourced on December 21, 2021.

In this article, I want to augment the information in the original article with Quality Snapshots and valuations of each stock, in order to provide more information for investors considering possible purchase decisions.

Quality Snapshots are an excellent way to get a handle on the overall quality of a company’s model and its sustainability. Quality Snapshots are based on five factors from trusted independent sources:

There are five factors altogether, and each factor can get up to 5 points, for a possible maximum score of 25. I interpret the scores like this:

Valuations will be calculated using my usual 4-model system, which produces a valuation ratio that expresses each stock’s current price as undervalued, fairly valued, or overvalued.

Finally, at the end of this article, I’ll pull everything together in summary. The stocks are presented here in alphabetical order.

Duke Energy (DUK)

Sector: Utilities
Industry: Electric Utility
Dividend Yield: 3.8% (mid-range)
5-Year Annual Dividend Growth Rate: 3%/year (slow)
Dividend Growth Streak: 18 Years

Company Description

Duke Energy has paid uninterrupted quarterly dividends for 90 years and has a current dividend-growth streak of 18 years as a result of its raise in 2021.

Duke is the largest electric utility in the country, with over $23 billion in annual revenue and operations reaching across the Southeast and Midwest. It is a regulated utility that serves approximately 7.7 million electric customers and 1.6 million gas customers. This slide shows Duke’s service territories.

(Source)

With a single exception, all of Duke’s electric utilities operate as sole suppliers within their service territories. The downside to the “monopoly” enjoyed by regulated utilities is that their services are priced by state commissions. Duke’s regulators are generally considered to be constructive, meaning that they allow its regulated utilities to earn an attractive and timely return. 

Duke’s Quality Snapshot

Duke’s score of 17 indicates that it is a high-quality investment-grade company.

Duke’s Valuation

I use four valuation methods, and then combine them to arrive at a valuation ratio.

The first two models are displayed on FASTGraphs price charts. The orange (or magenta) and blue lines are fair-value reference lines.

In the discussion of later stocks, I will introduce the other two valuation models. My conclusion for Duke is that its valuation ratio currently is 1.08, meaning that Duke is 8% overvalued at its current price of about $104. Here is my assessment of fair prices and yields for Duke.

I see Duke as about $3 too expensive at the present time.

Enterprise Products Partners (EPD)

Sector: Energy
Industry: Oil & Gas Storage and Transportation
Dividend Yield: 8.6% (high)
5-Year Annual Dividend Growth Rate: 3%/year (slow)
Dividend Growth Streak: 22 Years

Company Description

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

As with most pipeline companies, the business model makes most of its money from the fees it charges customers for transportation and storage services. This fee-based arrangement somewhat insulates EPD from volatile oil and gas prices.

The pipeline business has many attractive qualities, including:

  • High cost and long time required to build pipelines discourages competitors.
  • Only so many pipelines are needed in any given area.
  • Demand for moving oil and gas products tends to be stable.

Thanks to these qualities, EPD has paid uninterrupted distributions since going public in 1998.

EPD eliminated incentive distribution rights between 2002 and 2011. It was also one of the first MLPs to shift to a self-funded business model to reduce dependence on capital markets, completing the changeover in 2018. It has generally displayed a disciplined approach to debt. 

Enterprise’s Quality Snapshot

EPD’s Quality Score of 17 means that it is a solid, investable stock from an overall quality point of view.

Value Line’s Financial Strength grade is a little low, but I noticed that they give no higher grades on either Financial Strength to any company in the in the pipeline MLP industry. I assume that reflects their beliefs about the industry itself. That low grade seems to fly in the face of EPD’s dividend record, which includes 22 straight years of distribution increases, and its Safe Dividend Safety score of 65.

EPD’s credit rating of BBB+ is investment-grade, and again that ties EPD for the highest grade in its industry.

EPD’s Valuation

Let’s look at the third model I use for valuing stocks: Morningstar’s discounted cash flow (DCF) model. Many investors consider DCF to be the best method of assessing stock valuations.

Warren Buffet has said, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”

The DCF model requires the analyst to model all of the company’s future profits (year by year out to infinity), then discount the sum of them back to the present to reflect the time value of money. That gets you to Buffett’s description of fair value.

In my experience, Morningstar uses careful, conservative inputs into its DCF calculations. Here’s their result for EPD:

Their valuation ratio is 0.81, suggesting that EPD is 19% undervalued. I applied all 4 models to EPD, and I came up with an average valuation ratio of more than 20% undervalued at EPD’s recent price of $25.50. The overall result seems extreme to me, so to be conservative, I cut off the valuation ratio at 0.80.

That gives us these results:

At its current price of about $26 and yield of 8.6%, now seems like a good time to consider buying EPD. 

Healthcare Trust of America (HTA)

Sector: Real Estate
Industry: Health Care REITs
Dividend Yield: 3.9% (mid-range)
5-Year Annual Dividend Growth Rate: 2% per year (slow)
Dividend Growth Streak: 7 Years

Company Description

Healthcare Trust of America (HTA) is the largest dedicated owner and operator of medical office buildings in the U.S. It owns more than 23 million square feet of properties that are used by healthcare systems, academic medical centers, and physician groups. HTA has constructed a diversified portfolio: No tenant accounts for more than 5% of rent, nor does any city account for more than 13% of the portfolio’s total square footage.

Approximately two-thirds of HTA’s real-estate is located on the campuses of nationally or regionally recognized healthcare systems, which helps create more demand from medical practices for its properties.

As a REIT, HTA is required by law to pay out at least 90% of its taxable income as dividends. Therefore, the company must issue equity and debt to fund its growth. HTA has a strong balance sheet, reasonable debt maturities, and excellent liquidity.

HTA has positioned its finances conservatively, with relatively low financial leverage, limited near-term debt maturities, and over $1 B in liquidity.

HTA has raised its dividend each year since it went public in 2012.

Quality Snapshot


Unfortunately, there is no overall Quality Snapshot grade for HTA, because Value Line does not have ratings for the stock that I could find, and Morningstar does not have an analyst assigned to the stock.

Healthcare Trust’s Valuation

The fourth of my four models for valuing stocks is a simple comparison of the stock’s current yield to its 5-year average yield. Simply Safe Dividends provides graphs of the “relative yield” metric:

You can see that HTA’s current yield is less than its 5-year average, which suggests that HTA is overvalued at the present time. I checked the other models, and in the aggregate, the average valuation ratio is 1.07. That suggests 7% overvaluation.

HTA’s current price of about $33 and yield of 3.9% are just outside its fair price and yield ranges shown in the following table.  In constructing these ranges, I leave a cushion above and below my exact calculation of fair price, to account for the fact that all valuation models are estimates.

Magellan Midstream Partners

Sector: Energy
Industry: Oil & Gas Production MLP
Dividend Yield: 9.3% (high)
5-Year Annual Dividend Growth Rate: 6%/year (fast for high-yielder)
Dividend Growth Streak: 20 years including 2021

Description

Magellan Midstream Partners (MMP) is a master limited partnership (MLP) that transports, stores, and distributes petroleum products (59% of operating profits) and crude oil (34%). It also has a marine storage business (7%).

Unlike some MLPs, Magellan has a simple organizational structure with no incentive distribution rights. That means that it does not have to give any of its distributable cash flow to a general partner, so the company can keep more cash for reinvestment and faster growth.

The company owns over 13,000 miles of pipelines, mostly for refined products, as well as more than 50 storage terminals. Magellan has the longest refined products pipeline system, giving it unique access to a large number of refiners.

As is common in the pipeline industry, the business model (which generates storage and transport fees) is somewhat insulated from the volatility of commodity prices. Magellan employs long-term contracts that guarantee the company a minimum level of volume and predictable cash flows. 

Magellan’s Quality Snapshot

MMP has historically paid one of the safest distributions in the MLP sector. In fact, MMP has maintained sector-leading credit metrics for several years, with relatively low debt and a mid-investment-grade credit rating. The company does not depend much on issuing equity to fund its distribution or growth projects. Its share count is slightly smaller than it was 10 years ago.

(Source: Simply Safe Dividends)

Magellan’s Valuation

Using my four valuation models, I came up with a valuation ratio of less than 0.70, suggesting extreme undervaluation. All four models were in general agreement that the stock is undervalued, but I put a floor under the ratio at 0.80 to be conservative. That yields these results:

At its current price of about $44 and yield of 9.3%, now is a great time to buy Magellan Midstream Partners.

Old Republic International (ORI)

Sector: Financials
Industry: Property and Casualty Insurance
Dividend Yield: 3.7% (mid-yield)
5-Year Annual Dividend Growth Rate: 3%/year (slow)
Dividend Growth Streak: 39 Years

Company Description

Old Republic (ORI) is an insurer founded in 1923. Around half of the firm’s profits come from general insurance, covering areas such as workers compensation, trucking insurance, home warranties, and aviation. Another third is generated by title insurance offered to real estate purchasers.

Morningstar generally awards no moat to any insurer, because the industry is characterized by barely distinguishable services and cutthroat competition. Long-term success for any insurer depends on risk management. Old Republic has excelled in this area, because of its disciplined underwriting process, which lowers the risk of major losses.

ORI’s title insurance business is a steadying influence, because it pulls in all revenue upfront, and losses tend to be minimal. This provides the company with healthy diversification and reduces its underwriting volatility.

Like most insurance companies, ORI generates a substantial amount of its net income by earning investment returns on its float (insurance premiums collected but not yet paid out in liabilities). 

Quality Snapshot


Because no Morningstar analyst covers ORI, I can’t complete a Quality Snapshot for ORI. I don’t attach much meaning to its algorithmic no-moat rating.

Clearly its best grade is its Dividend Safety score of 73, which was recently reaffirmed, and its 39-year dividend-growth streak is impossible to argue with. Notionally, I would consider Old Republic to be investable with an imputed score of 15 or 16.

Value Line’s relatively weak Financial Strength grade of B+ stands in contrast to Simply Safe Dividends’ analysis:

Old Republic has demonstrated a long history of running its business conservatively. In addition to its underwriting results over the decades, Old Republic has focused on maintaining a low amount of leverage and a healthy capital position to cushion any unexpected losses. …With a projected payout ratio below 50% and large, diversified sources of earnings, we expect Old Republic’s dividend to remain safe throughout the industry’s unpredictable cycles.

Valuation

I put ORI through my four valuation models and, after making conservative adjustments to the FASTGraphs results, came up with a valuation ratio of 0.89, suggesting that ORI is undervalued by 11%.

At its current price of about $24 and yield of 3.7%, ORI looks like it’s in bargain territory at the present time.

Philip Morris International (PM)

Sector: Consumer Staples
Industry: Tobacco
Dividend Yield: 5.4% (high)
5-Year Annual Dividend Growth Rate: 3%/year (slow)
Dividend Growth Streak: 14 years (every year since being split off from Altria)

Company Description

Philip Morris (PM) was spun off from Altria in 2008, absorbing the international rights to Altria’s brands, including Marlboro, the No. 1 cigarette brand in the world.

PM markets its tobacco and related products to more than 150 million customers in over 180 countries. It has around 30% international market share (excluding China and USA).

Geographically, the European Union and Asia are the company’s most important regions (each supplying about 1/3 of income), followed by Eastern Europe, Middle East and Africa (around 20% of income), and Latin American and Canada (roughly 10% of income).

Philip Morris enjoys the No. 1 or No. 2 market share position in most of the countries it competes in as a result of its strong brands, which give it a measure of pricing power in the premium end of the market. While cigarette consumption is in secular decline, the company generally can offset lower volumes with higher prices.

While traditional tobacco products still generate the majority of the company’s profits, reduced-risk products, or RRPs, now account for over about 30% of sales and are growing rapidly. RRPs are products that present, or are likely or have the potential to present, less risk of harm to smokers who switch to them versus continuing smoking. PM has a range of RRPs in various stages of development, scientific assessment, and commercialization.

Since 2008, PM 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).

Philip Morris’ Quality Snapshot

Philip Morris comes in with an investment-grade Quality Snapshot of 17 points. Two categories are in the green: Its Wide moat rating from Morningstar, and Simply Safe Dividends’ dividend safety grade of 70 / 100.

PM’s Valuation

I put PM’s stock through my four valuation models. No adjustments were needed, and the average valuation ratio was 0.94. That suggests that PM is just under its fair-value range at the moment.

At its current price of about $93 and yield of 5.4%, this would be an attractive time to buy PM from a valuation standpoint.

Realty Income (O)

Sector: Real Estate
Industry: Retail REITs
Dividend Yield: 4.3% (high)
5-Year Annual Dividend Growth Rate: 4%/year (slow)
Dividend Growth Streak: 27 Years

Realty Income (O) bills itself as “The Monthly Dividend Company,” leaving no doubt to investors what its major appeal is. The company has paid monthly dividends for more than 45 consecutive years and raised them every year for the past 29. It usually increases its dividend more than once a year.

Founded in 1969, Realty Income owns more than 11,000 commercial properties across 49 states. Almost all of its properties are free-standing, single-tenant facilities located in large markets. They are leased to more than 600 different commercial tenants doing business in over 60 different industries. No industry accounts for more than 12% of rent.

Realty Income’s occupancy rate has been exceptional, even through recessions and the pandemic, never falling below 96% since 1992, and usually closer to 98% (currently 98.8%).

Realty Income’s long-term success has been driven by its diversified portfolio, disciplined capital allocation, focused business strategy, and strong financial health. Following the “triple-net” formula, the tenants (not Realty Income) are responsible for all of the operating expenses for the property: The tenants handle building insurance, property insurance, and real estate taxes. Most of its lease contracts have built-in rent escalators.

Realty Income’s Quality Snapshot

Morningstar only gives moats to about 3 companies in the Real Estate sector. A moat is a sustainable competitive advantage. I’m not sure that the absence of a moat from Morningstar matters much for a REIT like Realty Income, given its obvious success over a long period of time. Clearly it has sustainable advantages with regard to the properties that it owns, and it has shown no difficulty in obtaining new, attractive properties in the course of its long-term overall growth, as shown here:

Even with a no-moat analyst assessment, Realty Income still scores 17 points on its Quality Snapshot, which is a solid investment-grade score. The company’s long-term leases, consistently strong occupancy rates, quality locations, industry diversification, and financially healthy tenants seem likely to keep the dividend well covered by cash flow.

Realty Income’s Valuation

Realty Income produced a 0.99 valuation ratio from my four models. All models were tightly bunched around each other, which lends a bit of confidence to the estimate.

At its current price of about $67 and yield of 4.4%, Realty Income is fairly priced right now.

Telus Corporation (TU)

Sector: Telecommunications
Industry: Diversified Communications Services
Dividend Yield: 4.6% (high)
5-Year Annual Dividend Growth Rate: 7%/year (fast for high-yielder)
Dividend Growth Streak: 17 Years

Company Description

Telus, founded in 1993, is one of Canada’s largest telecom providers. It has about one-third of the national wireless market and over 40% of the internet market.

Telus became Canada’s top wireless company in 2000 when it acquired Clearnet Communications. The deal transformed Telus from a regional phone company to a national wireless business.

Since then, the company has shifted away from its legacy phone business toward faster-growing and more profitable wireless, internet, and pay TV businesses. Telus’ investments into its wireless network have allowed it to win market share and generate dependable subscriber growth. The high quality of its network also results in pricing power to steadily increase its average revenue per user. The company has the best customer retention of any Canadian telecom.

Quality Snapshot for Telus

Telus grades out at 17 Quality Snapshot points, which puts it solidly in the investable category. Three of its five grades are in the green zone, but the overall grade is pulled down by the mediocre Financial Strength grade from Value Line. The company’s strong Dividend Safety score partially reflects Telus’ performance during the 2007-2009 financial crisis, through which it continued growing its payout, reflecting its stable revenue and earnings – most consumers and businesses need telecom services even when economic times are tough.

The company has stated a target to increase dividends by 7% to 10% annually through 2022 while maintaining a moderate payout ratio.

Investors should note that, as a Canadian company, Telus dividends are subject to 15% withholding tax. Tax treaties between the U.S. and Canada allow you to potentially recoup this withholding (consult your tax advisor). Also, for non-Canadian investors, Telus pays its dividend in Canadian dollars, so your actual cash flow will be affected by foreign exchange rates.

Telus’s Valuation

Telus has been on a price tear for the past couple of years, so it looks way overvalued under the P/E-based models. But Morningstar’s DCF model has it as slightly undervalued, and the relative-yield model has it almost exactly as fairly valued.

Given the wide discrepancies among the models, I adjusted the P/E models to make them less outliers, but still came up with a valuation ratio of 1.11, which suggests that TU is overvalued.

At its current price of about $23 and yield of 4.6%, now does not look like the best time to buy Telus, although it’s not far off.

Verizon Communications

Sector: Telecommunications
Industry: Diversified Communications Services
Dividend Yield: 4.8% (high)
5-Year Annual Dividend Growth Rate: 2%/year (slow)
Dividend Growth Streak: 14 Years

Company Description

Verizon is a popular holding for many retired investors who value safe income and capital preservation. The firm has paid dividends for more than 30 years and has raised its payout for 15 consecutive years with its most recent raise in November.

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

Telecom is a capital-intensive business. Verizon typically invests tens of billions of dollars per year in capital facilities, system enhancements, and spectrum licenses.

Investments like those have earned the company a strong reputation for wireless reliability, speed, and network performance. Its annual customer churn rate is only about 1%.

The next technological step is 5G wireless technology, which Verizon has been developing since 2016 and is beginning to roll out. The biggest uncertainty facing Verizon is future growth in wireless. Subscriber growth has largely plateaued, as smartphone penetration has tripled since 2010 and is nearing its practical maximum.

Verizon’s Quality Snapshot

Verizon’s Quality Snapshot score of 22 puts it in the Very High-Quality range. Verizon has the highest Quality Snapshot among the 10 stocks discussed here. Note in particular its score of 87 for dividend safety, which is in the highest tier of scores for that factor.

Verizon’s Valuation

My four valuation models (with two capped to eliminate extreme results) suggest that Verizon’s valuation ratio is 0.86, which suggests undervaluation.

At its current price of about $53 and yield sitting at almost 4.9%, Verizon looks like a good buy right now.

W.P. Carey (WPC)

Sector: Real Estate
Industry: Diversified REITs
Dividend Yield: 5.2% (high)
5-Year Annual Dividend Growth Rate: 2%/year (slow)
Dividend Growth Streak: 22 Years

W.P. Carey (WPC) is a triple net lease REIT. It owns over 1,200 diversified properties in 19 countries around the world. Of its 350 tenants, none is responsible for more than 4% of rent. Diversification strategies have resulted in coverage of 29 industries, multiple property types (industrial, office, retail, storage), and geographic spread (35% of sales come from outside of the USA, primarily from Western and Northern Europe).

WPC also manages more than $10 billion in non-traded REITs under its asset management business, although management is gradually shutting down this division to focus on its core triple-net-lease operations.

WPC’s management takes a disciplined approach to growth, which has both earned the company an investment grade credit rating and helped it maintain an occupancy rate above 96% for more than a decade (currently 98%).

WPC’s average lease term is near 10 years, and 99% of its leases have built-in rent escalators.

Quality Snapshot

I cannot complete WPC’s Quality Snapshot, because Morningstar has no analyst assigned to the company. The algorithmically-assigned “none” moat rating does not strike me as meaningful, although as noted earlier, Morningstar rarely awards moat ratings to REITs.

Simply Safe Dividends, which has analyzed the company, gives it an above-average “Safe” dividend rating, meaning that its dividend looks secure and is unlikely to be cut. WPC has increased its dividend every year since going public in 1998.

Valuation

All four of my valuation models agree that WPC is overvalued. Averaging them out, I get a valuation ratio of 1.15, or 15% over fair value.

WPC currently sells for about $81 and yields 5.2%, so now does not look like the best time to buy it.

Final Thoughts

The following table summarizes the 10 stocks covered in this article.

I could not complete the Quality Snapshots for three of the companies due to lack of full information: Healthcare Trust of America (HTA), Old Republic Insurance (ORI), and W. P. Carey (WPC).

Of the remaining seven, Verizon (VZ) got the highest quality score at 22 (Above Average), while all the rest (oddly) scored 17, which makes them solidly investable.

In the table above, I provided each stock’s Simply Safe Dividend’s safety grade, even though it is also embedded in the quality scores. That may seem redundant, but dividend safety is very important to retirees and income-focused investors, so I think it deserves repeating as a stand-alone metric.

It is heartening to see that six of the 10 stocks are undervalued or fairly valued right now. They comprise a nice “watch list” of stocks to possibly buy or add to. I would wait on the others to come into their fair value range before considering them.

Here are the undervalued or fairly valued stocks, this time ordered by their degree of attractiveness based on valuation.

— Dave Van Knapp

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Source: DividendsAndIncome.com