OKE - Buy Alert: 3 Undervalued High-Yield Gems For Your Retirement

2023-05-26 09:00:00 ET

Summary

• This article discusses three high-yielding stocks for retirees and income-oriented investors: ONEOK, AbbVie, and Realty Income.
• ONEOK is a cyclical income play with a 6.5% yield, AbbVie offers a high-quality healthcare yield of 4.2%, and Realty Income provides steady and reliable dividend growth with a 5.2% yield.
• These stocks offer a combination of impressive dividend growth, high yields, and exceptional business models, making them suitable for retirees seeking sustainable long-term returns.

Introduction

This year, I started to focus more on higher-yielding stocks as I am trying to find a better balance between lower-yielding growth stocks and higher-yielding stocks providing a steady income.

After writing a dividend growth-focused article earlier this week, I'm dedicating this article to three high-yielding stocks that I consider perfect picks for retirees and investors preparing a portfolio for their retirement.

These stocks offer a winning combination: impressive dividend growth, high yields, and exceptional business models, promising substantial long-term returns.

While I'm not giving you close-to-double-digit yields in this portfolio, I believe these picks are superior to most ultra-high-yielding stocks.

With all of that said, let's get to it!

Planning For Retirement

There are two reasons for me to increasingly focus on income plays.

1. My follower base focused on higher-yielding stocks has increased significantly since I started to cover income plays. Also, as I focus a lot on dividend growth, I find that I need to balance it a bit.
2. The number of retirees is now exponentially growing, which shifts demand to income-generating stocks. The same goes for my private clients. Most of them are now close to retirement.

As written by the Wall Street Journal in March, America is about to see a wave of retirees. Needless to say, the same goes for a wide number of other nations as well. By 2030, one in five Americans will be over age 65.

Furthermore, the paper perfectly captures the issue we're dealing with (emphasis added):

Some aim to build nest eggs of $1 million, $2 million or more, though the majority of people have far less than that to work with . The recent bout of high inflation and market turmoil have added more anxiety to the challenge of making that money last.

Most people know they need a large nest egg to boost their retirement income. However, most also know they will have major issues reaching their goals. While I know that some of my readers are in great financial shape, I know a lot of people who are close to living paycheck to paycheck.

In the US, more than 60% of people are living paycheck to paycheck . Even among higher-income families, that number is above 40%!

With that said, during retirement, most people get social security. According to the aforementioned WSJ article, the average benefit is $1,825.

That is a good start if people do not have major financial obligations. People paying rent and other services that are often necessary during retirement will need more than that to get by.

The chart below shows that costs like health expenses soar the older we get.

The good news is that the median American has enough to pay for emergencies - on paper. However, the median net worth, which includes primary homes, isn't high enough to generate a high passive income. Especially not because most primary residences aren't income-generating assets.

Net worth tends to peak around the time many people start spending down their assets in retirement. People 65 to 74 have a median net worth of $266,400 and an average net worth of $1,217,700, according to the Federal Reserve . People 75 or older have a median net worth of $254,800 and an average net worth of $977,600.

The solution to this is: make more money.

Unfortunately, it's not that easy, which is why my advice is to save whatever you can, even if it's just $100 per month. It won't get you rich, and it most likely won't allow you to build a large nest egg. However, everything helps in a scenario where we're about to see a wave of new retirees who will depend on income.

Even small amounts benefit from compounding interest. Especially when invested in the right assets.

Hence, in this article, I focus on picks that have satisfying yields and business models that provide safety and long-term (dividend) growth.

The Cyclical Income Play - ONEOK ( OKE ) - 6.5% Yield

The first pick is cyclical, which means investors need to expect elevated volatility when economic growth expectations go south.

While it may not be the best pick for conservative investors who are already retired, I still put it in this article, as I believe that it will be a great (but volatile) long-term investment for income-oriented investors.

Headquartered in Tulsa, Oklahoma, ONEOK is a midstream company. In other words, it owns and operates pipelines and related infrastructure to connect energy producers to its customers.

The company is a C-Corp. It does NOT issue a K-1 form. This makes it easier when it comes to taxes.

The company operates one of the biggest pipeline networks in North America, which includes 40,000 miles of natural gas and natural gas liquids pipelines. Roughly 10% of the nation's natural gas production relies on OKE's infrastructure.

OKE's revenue is generated based on volumes rather than relying directly on commodity prices. This means that fluctuations in commodity prices do not have a direct impact on its earnings. However, there is a cyclical risk associated with demand. If there is an expectation of slower economic growth, it is likely that energy demand will decline temporarily. Additionally, if energy prices remain significantly low, producers may reduce their output, leading to a decreased need for pipelines.

Given my long-term view on energy, I do not expect energy prices to reach depressed levels as we saw in 2015 and 2020. If anything, I'm extremely bullish on North American energy.

Moreover, despite temporary headwinds in the energy sector, OKE hasn't cut its dividend for more than 25 years. Between 2000 and 2023, the company has hiked its dividend by 12% per year.

The 5-year average annual dividend growth rate is 4.4%. On January 18, the company hiked its dividend by 2.1%. The company targets a 3.5x net leverage ratio and maintains a healthy BBB-rated balance sheet.

Please note that the company's yield isn't 5.8% (as seen in the slide above) but 6.5%

The yield has increased due to a decline in OKE's stock price.

The stock is under pressure as a result of the pending acquisition of Magellan Midstream Partners ( MMP ). This 63% stock/37% cash deal with a transaction volume of $18.8 billion is expected to make OKE one of the largest North American midstream companies.

The company will also be highly diversified as it adds crude oil and refined product exposure to its portfolio.

On a long-term basis, I expect OKE to steadily grow its juicy yield and keep up with the market when it comes to the total shareholder return.

Pick number two isn't nearly as cyclical. It's rather anti-cyclical.

High-Quality Healthcare Yield - AbbVie ( ABBV ) - 4.2%

AbbVie is one of two healthcare companies in my portfolio. Earlier this month, I covered it because it has come down a lot. ABBV shares are currently down 14% year-to-date as a result of general weakness in healthcare and the patent loss of its Humira drug.

While that is a temporary setback, I believe in the company's ability to generate shareholder value.

After being spun off from Abbott Laboratories ( ABT ), the company has achieved an impressive annual return of 20.1%. Although it is unlikely for this level of performance to continue indefinitely, it's worth noting that the stock is not highly volatile, with a standard deviation of 26%. While this number exceeds the market's standard deviation, it remains relatively low for an individual stock.

While the company's Humira sales are down by a quarter, it raised its full-year adjusted earnings per share guidance to the $10.72-$11.12 range. The guidance, which excludes an estimate for acquired IPR&D expense that may be incurred beyond the first quarter, reflects anticipated net revenues of about $52.4 billion, an increase of $400 million.

Moreover, while the company is not expected to recover from slower Humira sales until at least 2026, EBITDA is expected to bottom this year, with 0.4% growth in 2024 and roughly 9% growth in 2025.

The company also has a terrific dividend scorecard. The company has a 4.2% dividend yield and 14.5% average annual dividend growth over the past five years. Since its spin-off, it has hiked its dividend every single year.

On October 28, the company hiked its dividend by 5%, which is a result of the decline in sales.

The good news is that even in 2023, the dividend-cash payout ratio is still 65%. That number is expected to decline to 52% in 2025, paving the way for higher dividend growth.

While ABBV's stock price performance is currently disappointing, I expect the company to outperform the market on a long-term basis while consistently growing its juicy dividend.

I have expanded my ABBV position significantly this year, and I'm looking to add more exposure as long as the price remains close to current prices.

Steady Income - Realty Income ( O ) - 5.2%

Realty Income is one of the safest bets in real estate - or high-yield investing, in general.

Realty Income is the sixth largest REIT in the United States, focused on triple-net lease retail real estate. Triple-net means tenants pay all expenses, including real estate taxes, insurance, and maintenance. These expenses are in addition to the cost of rent and utilities.

Realty Income is a monthly dividend payer, which means investors get a more frequent flow of income. The company has an A- credit rating and close to 12,500 commercial properties in its portfolio.

The biggest part of its assets is anti-cyclical businesses, which are run by some of the strongest operators in North America and the United Kingdom, where the company has 10% exposure.

Thanks to these qualities, the company has steady and reliable dividend growth. Since 1994, the company has returned 14.6% per year, including dividends. Its beta versus the S&P 500 is 0.5, which indicates low volatility.

Furthermore, the company has had 4.4% compounded annual dividend growth since 1994. It has hiked its dividend for 29 consecutive years, making the company a dividend aristocrat.

While Realty Income isn't a fast-growing company anymore, it's a great high-yield stock with reliable income and a high likelihood of satisfying long-term total returns.

Furthermore, the current sell-off offers opportunities as high-interest rates and general economic weakness have caused the stock to lose a fifth of its market cap from its 52-week high.

While I wouldn't rule out a stock price decline to $50 if economic conditions deteriorate further, I believe that Realty Income is trading at a favorable risk/reward.

Not only is the dividend yield at one of the highest levels in over a decade (it's 5.2%, NOT 4.7%, as shown in the chart below), but the company is also attractively valued using the funds from operations multiple, which is at just 16x.

With that said, here's my takeaway.

Takeaway

In this article, I have discussed three top picks for retirees and income-oriented investors.

The first pick, ONEOK, is a cyclical income play with a 6.5% yield. Despite potential volatility in the energy sector, ONEOK has a strong track record of dividend growth and a diversified infrastructure network, making it a promising long-term investment.

The second pick, AbbVie, offers a high-quality healthcare yield of 4.2%. While the company faces temporary setbacks due to the patent loss of its Humira drug, it has demonstrated the ability to generate shareholder value over time. With a solid dividend scorecard and a recovery expected from slower sales, AbbVie presents a compelling investment opportunity.

Lastly, Realty Income is a safe bet in the real estate and high-yield investing realm. As a monthly dividend payer with a strong portfolio of triple-net lease retail properties, Realty Income offers steady and reliable dividend growth. Despite recent market challenges, the company's high dividend yield and attractive valuation make it an appealing choice for long-term total returns.

In an environment where retirees and other investors need dependable income, these three stocks provide a good combination of impressive dividend growth, high yields, and exceptional business models. While they may not offer ultra-high yields, they are superior choices for retirees seeking sustainable long-term returns.

For further details see:

Buy Alert: 3 Undervalued High-Yield Gems For Your Retirement