The 10 Best Stocks to Own for Retirement

November 2022 Edition

The stocks on this list offer an average dividend yield above 4%, have solid Dividend Safety Scores, are less volatile than the broader market, possess defensive characteristics, 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: 4.5% Forward P/E Ratio: 16.3 (as of 10/7/22)
Sector: Utilities Industry: Electric Utility
Dividend Growth Streak: 16 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 16th consecutive year in 2022.

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 $25 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 7.8 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.

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 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 BBB+ 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% in July 2022. 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: 7.0% Forward P/E Ratio: 7.3 (as of 10/7/22)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 16 Years

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 over 15 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.

Overall, Verizon maintains about 140 million wireless retail connections, 7 million internet subscribers, and 4 million video subscribers.

Business Analysis
Maintaining a quality wireless network across the country costs a lot of money. Verizon invested more than $20 billion in capital and spectrum licenses during 2021 to increase the future capacity of its wireless network and enhance its fiber network.

Thanks to its investments, the company has remained near 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%. Most 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, especially following a period of debt-fueled investment to roll out 5G. 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.

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), near its lowest level in over a decade.

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 maintains a BBB+ investment-grade credit rating from S&P even after borrowing to fund $45 billion of spectrum purchases in early 2021.

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.

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 2022, 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: 7.6% Forward P/E Ratio: 7.2 (as of 10/7/22)
Sector: Energy Industry: Oil and Gas Storage and Transportation
Dividend Growth Streak: 23 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 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 MLPs 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.

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 60%. 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 23 consecutive years, recording 3% 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 2.2% in July 2022.

Stock #4: National Retail Properties (NNN)

Stock #4: National Retail Properties (NNN)
Dividend Yield: 5.6% Forward P/E Ratio: 12.1 (as of 10/7/22)
Sector: Real Estate Industry: Health Care REITs
Dividend Growth Streak: 32 Years

Founded in 1984, National Retail now owns more than 3,000 retail properties throughout the U.S. The REIT’s properties are leased to more than 350 tenants operating in over 30 industries, with a focus on serving experiential or service businesses such as restaurants, convenience stores, auto shops, and gyms.

Business Analysis

National Retail’s triple-net lease structure provides the REIT with a high-margin stream of rent that is further protected by the company’s diversification. No industry served by National Retail exceeds 20% of rent, no tenant is greater than 5% of rent, and the portfolio is spread nicely across America. By avoiding retail categories most susceptible to e-commerce such as department stores and malls, National Retail’s business is highly durable.

Key Risks

Brick-and-mortar retail is evolving as more consumer spending moves to online channels. For now, National Retail has managed to avoid the most vulnerable areas such as strip centers and malls, as well as certain industries like department stores. After taking a hit during the pandemic, the REIT’s rent collection and occupancy rates have rebounded to very strong levels.

National Retail has a Dividend Safety Score of 70, indicating its dividend looks unlikely to be cut.

The REIT’s dividend safety is supported by its adjusted funds from operations payout ratio which sits near 70%. Given the firm’s diversified mix of tenants, historical track record of managing underwriting risk, and long-term leases, that’s a very reasonable level.

Management also prioritizes maintaining low financial leverage. The company enjoys a BBB+ credit rating, reflecting its healthy debt ratios. This helps ensure National Retail maintains access to capital markets over a full cycle.

Dividend Growth Analysis

National Retail has increased its dividend every year since 1990, giving it one of the longest growth streaks of any REIT. With a conservative payout ratio policy, investment grade credit rating, and highly diversified cash flow stream, NNN should remain a reliable dividend grower.

Looking ahead, National Retail’s dividend will likely continue growing at a low single-digit rate, matching growth in its underlying cash flow. The firm last raised its payout by 3.8% in July 2022.

Stock #5: TELUS Corporation

Stock #5: TELUS Corporation (TU)
Dividend Yield: 5.2% Forward P/E Ratio: 20.5 (as of 10/7/22)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 17 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 bouts of volatility in recent years 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. For now, the industry’s long-term dynamics appear intact.

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 Dividend Achiever (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: Old Republic

Stock #6: Old Republic (ORI)
Dividend Yield: 4.2% Forward P/E Ratio: 9.8 (as of 10/7/22)
Sector: Financials Industry: Property and Casualty Insurance
Dividend Growth Streak: 40 Years

Old Republic is a commercial lines underwriter and was founded in 1923. Around half of the firm’s operating income is generated from providing general insurance, covering areas such as workers compensation, trucking insurance, home warranty, and aviation. Another third of profits are from title insurance, which is offered to real estate purchasers.

Business Analysis
The insurance industry is characterized by essential services and cutthroat competition. Most firms compete primarily on price and distribution, but long-term success is all about risk management. Old Republic has excelled here.

The company’s general insurance business has registered combined ratios below the industry’s average for 41 of the last 50 years, reflecting management’s disciplined underwriting process. The firm also has minimal property/catastrophe exposure within the business it underwrites, lower the risk of major losses.

Old Republic’s title insurance business is worth noting as well. It operates differently from general insurance since the full premium is collected upfront and losses tend to be minimal. This provides the company with healthy diversification and reduces underwriting volatility.

Key Risks
Despite Old Republic’s conservative management style, its business lines can still experience volatile operating conditions. For example, the title insurance business is dependent on strong sales volumes in housing and commercial real estate markets, which are tied to the health of the U.S. economy.

Old Republic, like most insurance companies, also generates a substantial amount of its net income by earning returns on invested float. The company invests a portion of the premiums it earns into a portfolio of stocks and bonds. The income Old Republic earns from this activity is sensitive to changes in interest rates and financial markets.

Overall, management has done a good job positioning Old Republic to navigate the industry’s volatility and keep it positioned to pay a reliable dividend.

Old Republic has a Dividend Safety Score of 73, indicating that its dividend appears to be on solid ground.

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.

Dividend Growth Analysis
Old Republic has paid uninterrupted dividends since 1942 and increased its dividend each year for the past 40 years. Management last raised the dividend by 4.5% in February 2022, and we expect low to mid-single digit annual growth to continue.

Stock #7: W.P. Carey

Stock #7: W.P. Carey (WPC)
Dividend Yield: 5.9% Forward P/E Ratio: 13.7 (as of 10/7/22)
Sector: Real Estate Industry: Diversified REITs
Dividend Growth Streak: 23 Years

Founded in 1973, W.P. Carey is a triple net lease REIT that owns over 1,300 properties located in 19 countries around the world. W.P. Carey’s portfolio is broadly diversified across tenants (over 350, none greater than 4% 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.

Today, most of W.P. Carey’s portfolio focuses on properties that are operationally essential to their tenants. This includes corporate headquarters, key distribution facilities, and profitable manufacturing plants.

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, conservative capital allocation, and focus on owning strategically important properties. However, like most REITs, the firm’s higher leverage and modest growth rate can increase its sensitivity to rising interest rates in the short term.

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.

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 80%, 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 99% of its leases 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 1% 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.

Going forward, W.P. Carey’s dividend is likely to grow at a low single-digit annual pace, matching underlying growth in cash flow.

Stock #8: Realty Income

Stock #8: Realty Income (O)
Dividend Yield: 5.1% Forward P/E Ratio: 14.9 (as of 10/7/22)
Sector: Real Estate Industry: Retail REITs
Dividend Growth Streak: 27 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 100 times since 1994.

Realty Income was founded in 1969 and is a real estate investment trust (REIT) with more than 11,000 properties located across 50 states. Almost all of the company’s properties are single-tenant and are leased to more than 1,000 different commercial tenants doing business in over 70 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 (over 80% 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).

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 75%. As the economy continues to normalize, the company’s long-term leases, consistently strong occupancy rates, quality real estate locations, industry diversification, and financially healthy tenants seem likely to keep the dividend well covered by cash flow.

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: 6.0% Forward P/E Ratio: 15.3 (as of 10/7/22)
Sector: Consumer Staples Industry: Tobacco
Dividend Growth Streak: 13 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 (about a third of income) and Asia (about a third of income) are the company’s most important regions, followed by Eastern Europe, Middle East and Africa (around 20% of income) and Latin American and Canada (roughly 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 about 30% 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.

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 near 90%.

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. The firm last raised its dividend by 1.6% in September 2022.

Going forward, Philip Morris’ dividend will likely continue growing at a low single-digit pace as it continues investing in next-generation tobacco products.

Stock #10: Magellan Midstream Partners

Stock #10: Magellan Midstream Partners, LP (MMP)
Dividend Yield: 8.6% Forward P/E Ratio: 8.8 (as of 10/7/22)
Sector: Energy Industry: Oil & Gas Production MLP
Dividend Growth Streak: 20 Years

Magellan Midstream Partners is a master limited partnership (MLP) engaged in the transportation, storage, and distribution of refined petroleum products (70% of operating profits) and crude oil (30%). 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
With Magellan’s business focusing on refined transportation fuels such as gasoline, increased fuel efficiency and electric vehicle adoption pose long-term threats. That said, we expect the firm’s refined fuels business to remain in demand for some time thanks to a growing population and expanding middle-class, which depend on gasoline that is cheaper and more scalable than “green” alternatives.

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 distributions in the MLP sector, and its payout ratio over the last 12 months sits below 85% despite pandemic-related headwinds. The company also targets a distribution coverage ratio of at least 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 distribution 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 raised the distribution by 1% in October 2021, marketing the first increase since the pandemic began.

Management targeted 3% distribution growth in 2020 but the payout will remain flat for now. Despite lingering coronavirus-related headwinds, management believes distribution coverage will remain above 1.1x (albeit the lowest level in at least a decade).

— Brian Bollinger

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

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Stock #10: Magellan Midstream Partners