CA - Retire Early: 2 High Yielders To Buy And 2 To Avoid

Summary

• Early retirement is easiest when funded with reliable and growing dividends from high-yielding stocks.
• However, finding attractive yields that are also likely to remain safe and growing well into the future is easier said than done.
• We share two high-yielding securities to buy and two to avoid for a rich early retirement.

Early retirement is easiest when funded with reliable and growing dividends from high-yielding stocks. While there are certainly other paths, they all fall short of the dividend stock method for various reasons.

For example, rental property investing turns out to not be all that passive when accounting for dealing with tenants, toilets and trash. If you pay a property manager to handle these hassles, your profits end up taking a pretty substantial hit. If you don't go with a property manager and decide to handle it all yourself, you wind up becoming a businessman. While some enjoy this, it isn't exactly what many have in mind when they think of retiring.

Another very popular method of investing for retirement is consistently putting money into low-cost index funds like SPDR S&P 500 Trust ETF ( SPY ) or the Invesco QQQ ETF ( QQQ ), utilizing a dollar-cost-averaging strategy over time. Then, once your account principal reaches 25x your annual expenses, you can retire and live off of the "4% Rule" by withdrawing 4% of your retirement balance each year indefinitely. While this approach certainly checks the passivity box, it is also highly risky. If the stock market undergoes another lost decade where stock prices rise little if at all (which is very possible given the sky-high valuations and other macroeconomic forces at play as discussed in a recent article that you can read here ), you will rapidly deplete your retirement savings. Furthermore, given how high inflation is at the moment - with no signs of it normalizing anytime soon - your estimated living expenses at the start of your retirement will probably not be sufficient to fund your lifestyle within a few years of retiring.

As a result, we believe you can get the best of both worlds - the passivity of index investing with the passive income-based retirement of rental properties - by building a portfolio of high-yielding dividend stocks. However, to successfully invest this way, you cannot simply buy any high-yielding stock. It needs to be one whose dividend payout will be safe for many years to come and ideally grow as well. Of course, finding attractive yields that are also likely to remain safe and growing well into the future is easier said than done.

In this article, we share two high-yielding securities to buy and two to avoid for a rich early retirement.

2 High Yield Stocks To Buy

Probably our favorite high-yielding investment to buy today is Enterprise Products Partners ( EPD ). It is arguably the best-positioned midstream energy ( AMLP ) business in the world, with a well-diversified business model by geography and energy commodity exposure, a sector-leading BBB+ credit rating, a sky-high 7.5% tax-deferred distribution yield that is covered ~1.8x by distributable cash flow, solid mid-single digit annualized distribution growth, very defensive and inflation resistant cash flows, and fully aligned and skilled insiders who own ~1/3 of the partnership. Note that it does issue a K-1 tax form, however, so investors who wish to avoid that hassle may want to invest in Enbridge ( ENB ) or even a low-cost MLP like the Global X MLP ETF ( MLPA ) instead.

Another really attractive stock for retirees is STORE Capital ( STOR ). It is a triple net lease REIT that owns a broadly diversified portfolio of thousands of properties with over 570 different tenants spread across over 120 industries. This diversification, combined with a maniacal focus on property-level profitability metrics and conservatively termed triple net leases, creates a very stable income stream.

On top of that, it has a very solid investment grade balance sheet with well-laddered debt maturities and plenty of liquidity, making it a safe investment. Moreover, its 2022 payout ratio is expected to be around 70%, making the dividend quite safe. With a yield of 5.75% and a mid-single digit annualized dividend growth rate expected moving forward, the risk-reward for STOR as a passive income vehicle is exceptional.

2 High Yield Stocks To Avoid

One popular high-yield stock that we have been urging investors to steer clear of even before it slashed its dividend, is AT&T ( T ). While it sports an attractive current yield of 6.34%, its dividend growth prospects are very miniscule for the foreseeable future, with analysts expecting less than 1% annualized dividend growth over the next half-decade.

This is because its business is struggling to generate any meaningful earnings growth and also has a heavy debt burden. As a result, T is likely going to be deploying much of its cash towards growth-oriented CapEx as well as debt reduction in the coming years in order to strengthen its balance sheet and try to set itself up for a return to meaningful growth over the long term.

On top of that, the stock is not even that cheap, with the company's EV/EBITDA ratio currently roughly in line with its historical average. As a result, T will likely deliver underwhelming total returns for the foreseeable future and its dividend - while attractive on a current yield basis - is unlikely to grow at a rate even remotely approaching inflation.

Another popular high-yield stock we are avoiding is Altria ( MO ). While the company does offer a very attractive current dividend yield of 8.29%, it is generating lackluster growth and its annualized earnings per share growth forecast for the next half-decade is just 1.4%

Furthermore, management has proven to be subpar capital allocators by pouring billions of dollars into share repurchases at prices that wound up generating poor returns for shareholders and investing a ton of cash into diversification attempts like Juul and Cronos Group ( CRON ), both of which have wound up generating massive losses for MO.

Finally, MO's core cigarette business is seeing its volumes shrink and likely to continue doing so for many years to come. While price increases and efficiency improvements have more than offset the volume declines thus far in order to continue driving earnings growth, we expect the company to see the volume declines eventually overwhelm price increases and cost cuts. This will be due to an acceleration in volume declines as smoker-heavy generations die off and younger generations - which have proven to be less interested in smoking - make up a larger percentage of the population. Furthermore, inflationary pressures will also make it increasingly difficult for MO to improve its margins.

Until the company can prove that it has a viable and profitable long-term business model that can offset eventual declines in earnings from its cigarette business, we do not like the risk-reward at MO.

Investor Takeaway

Successfully investing for retirement is very challenging today given that valuations remain very high, interest rates remain well below the inflation rate, and multiple macroeconomic headwinds are weighing on corporate earnings. However, by investing in a diversified portfolio of high-quality high yielding stocks with the potential to continue growing their earnings and dividend payouts for years to come, retirees can enjoy a secure and passive retirement.

In this article, we shared two of our favorite retiree picks of the moment - EPD and STOR - while also cautioning against two other popular dividend stocks - T and MO - where we see challenges to their long-term growth and ability to deliver satisfactory returns to shareholders.

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