CA - 2 Retiree's Dream Stocks: Enbridge And W. P. Carey

Summary

• With the economy facing growing uncertainty, retirees are desperately searching for low-risk, high-yield opportunities that can help them confidently fund their lifestyle.
• While these opportunities are increasingly rare, they still exist.
• We discuss two of the best opportunities here - Enbridge And W. P. Carey.

The economy is facing substantial uncertainty at the moment thanks to continued high inflation, an increasingly likely recession hitting the U.S. this year, the Federal Reserve's continued hawkish approach to interest rates, and increasingly dangerous geopolitical conditions in Eastern Europe, the Middle East, and the Far East. On top of that, numerous valuation models show that the stock market ( SPY ) is at best fairly valued and most likely overvalued at the moment.

As a result, the 4% Rule is a risky way to approach a lengthy retirement and retirees are increasingly in need of low-risk, high-yield opportunities that can help them confidently fund their lifestyle. While these opportunities are increasingly rare, they still exist. We discuss two of the best opportunities available at the moment in this article: W. P. Carey ( WPC ) and Enbridge ( ENB ).

#1. W. P. Carey

WPC is a triple net lease REIT whose focus on owning and leasing out high quality "mission critical" single tenant free-standing real estate with long-term contracts and virtually zero CapEx requirements delivers very reliable and defensive cash flows with high free cash flow margins.

On top of that, it benefits from its significant diversification across 1,428 properties with 391 tenants spread across primarily North America and Europe. WPC's cash flow stream is further strengthened by the facts that investment grade tenants account for approximately one-third of its rent and its portfolio consists primarily of recession and e-commerce resistant properties (the clear majority of its ABR comes from industrial, warehouse, and storage properties while only 16% comes from retail real estate).

Something else that makes WPC stick out as a dream retiree stock is that most of its rent comes from leases that are CPI-linked. As a result, despite being in a sector that is often considered a bond-proxy, it still provides shareholders with pretty solid inflation protection.

WPC also lets retirees sleep well at night thanks to its solid balance sheet, which earns an investment grade (BBB) credit rating and positive outlook from S&P. This confidence is warranted due to its significant liquidity, well-laddered debt maturity schedule, and access to plenty of relatively cheap capital by opportunistically selling equity at meaningful premiums to NAV and tapping debt markets at attractive terms in both Europe and the United States.

Thanks to these defensive qualities, WPC thrived through the COVID-19 lockdowns better than perhaps any other triple net lease REIT and is now generating stronger organic growth than most REITs as well thanks to its inflation-linked rent escalators. This well-balanced approach has enabled it to deliver massive long-term outperformance while also growing its dividend every year since 1998. As a result, we expect it to achieve Dividend Aristocrat status this year.

Perhaps best of all, WPC currently trades at a reasonable price, giving retirees a chance to add these benefits to their portfolios without having to significantly overpay. It has a current 17.22x EV/EBITDA and 14.86x P/AFFO multiple compared to its 10-year respective averages of 16.98x and 14.16x. Furthermore, its 1.09x P/NAV ratio is at a discount to fellow blue chip peers like Realty Income ( O ), which sports a 1.15x P/NAV ratio, and is in-line with WPC's 10-year average P/NAV. With a 5.5% dividend yield and mid-single digit annualized dividend growth likely in store over the medium term, WPC is a retiree's dream dividend growth stock that will enable them to sleep well at night through all sorts of economic environments.

#2. Enbridge

ENB is another phenomenal retiree investment given its wide moat portfolio of midstream infrastructure assets, industry-best BBB+ rated balance sheet, and world-class management that has a tremendous track record for growing the dividend per share each year while also delivering long-term outperformance:

Its diversified midstream portfolio benefits from economies of scale, strong counterparties, and a very stable cash flow profile. It owns:

• the second-longest natural gas transmission pipeline network in the United States
• North America's largest natural gas distribution business. North America's longest crude oil pipeline network
• a high growth renewable power generation business that gives it some diversification against the ongoing energy transition

Its counterparty strength is evidenced by the fact that ~95% of its cash flow comes from investment grade counterparties and its stable cash flow profile is further enhanced (and protected from commodity price volatility) by the fact that 98% of its contracts are commodity price-proof. This strength has enabled ENB to grow its dividend for 27 straight years, putting it in an exclusive group of companies that have provided investors with long-term consistent dividend growth through thick and thin. It is also important to note that many of ENB's pipeline contracts are inflation-linked, so - when added to the fact that energy tends to benefit from inflation - ENB's business model is well positioned to protect investor's capital against inflationary forces.

As already mentioned, ENB's balance sheet is another reason for retirees to like the company, with plenty of liquidity and the majority of its debt with fixed interest rates that does not mature until the 2030s, 2040s, 2050s, 2060s, and even 2080s.

Finally, with a 6.6% forward dividend yield, a 12.38x EV/EBITDA multiple that stands at a meaningful discount to its 10-year average of 13.54x, and a 9.5x P/DCF multiple that implies very strong dividend coverage and sufficient excess distributable cash flow to invest in growth projects, the total return potential here is quite attractive.

Investor Takeaway

Both WPC and ENB are dream retiree stocks given their:

• high current yields
• very dependable cash flows throughout economic cycles
• rock-solid balance sheets and asset portfolios
• proven management teams
• inflation resistance
• solid long-term growth potential
• lengthy track records of growing their quarterly payouts and compounding investor wealth

While there are a few other opportunities in both the triple net real estate space and the midstream infrastructure space that we like as much or even more , WPC and ENB are a great place to start for retirees looking to establish a lower risk income portfolio that can deliver reliable income in excess of the 4% Rule. We rate both as attractive Buys at the moment as we expect them to continue growing and providing inflation-resistant passive income streams to investors over the long-term.

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