2023-08-02 09:30:00 ET
Summary
- Retirees increasingly invest in stocks over bonds, seeking higher yields and income despite higher risks.
- Hence, I provide two stocks that come with well-protected 5% dividend yields and room for future growth.
- Both plays come with attractive valuations and the ability to deliver both income and satisfying long-term capital gains.
Introduction
It's time to talk about two income stocks that come with not only potentially satisfying long-term capital gains but also decent income for income-oriented investors, which tend to be retirees or investors close to retirement.
While I'm still far away from retirement, there's no denying that there's an increasing need for high-quality income investments on the market. I've often made the case that the rapidly accelerating retirement wave is one of the reasons why I have decided to balance my coverage of low-yielding dividend growth stocks and higher-yielding income stocks.
Not only that but last month, the Wall Street Journal published an article discussing a significant shift in the investment priorities of America's retirees.
The trend we're witnessing is that retirees are increasingly disregarding conventional advice to protect their retirement savings by shifting investments to bonds.
According to recent data from Vanguard and Fidelity Investments, a significant number of retirees are choosing to hold a substantial portion of their portfolios in stocks.
- Almost half of Vanguard 401(k) investors over the age of 55 actively managing their money now have more than 70% invested in stocks, compared to 38% in 2011.
- Similarly, at Fidelity Investments, nearly four in 10 investors aged 65 to 69 hold about two-thirds or more of their portfolios in stocks.
There are a number of reasons that support this. However, the biggest one may be experience.
- People who retire now did not witness the Great Depression. Since 1928, the S&P 500 has returned 7.4%. Since 1982, that performance has risen to 10.1%. In other words, investors are used to high returns. Why go with bonds?
While older investors are enjoying the benefits of high returns in the stock market, this approach comes with above-average risks.
According to the article, financial advisers and economists caution that relying heavily on stocks later in life may expose retirees to potential market downturns, leading them to sell shares at unfavorable prices to meet immediate cash needs.
I completely agree with that and always caution retirees to play it safe.
Having said that, and being a stock guy myself, I believe I will be one of those retirees who won't invest in safe stocks. Even Warren Buffett (age: 92) is still investing for the long term!
Based on that context, most retirees are seeking higher-yielding investments, which is important as being retired means relying on income from investments.
Therefore, in this article, I'll give you two stocks that may provide food for thought. I believe that both stocks offer a top-tier income with relatively subdued risk. If I were dependent on income, I would own both.
VICI Properties ( VICI ) - 5.0% Yield
In real estate, it's always about location, location, location .
The properties of VICI are so special they have created their own advantage. After all, (almost) nobody goes to Las Vegas to enjoy the desert.
The buildings are what makes Las Vegas one of the most exciting vacation destinations for millions of people each year - and VICI owns many of them!
With a $32 billion market cap, VICI Properties is America's largest leisure-focused real estate investment trust ("REIT").
The company has a triple net lease model, which means its tenants pay rent in addition to taking care of maintenance, taxes, and insurance.
What's interesting is that the company doesn't have hundreds or thousands of tenants like other REITs. Excluding smaller recent acquisitions, the company has 11 tenants that account for almost every single penny of revenue.
As we can see below, these companies include the big guys like Caesars Entertainment ( CZR ) and MGM Resorts ( MGM ), who account for roughly 40% of total revenue each.
I have to say I was a bit baffled when I saw that The Venetian alone pays close to $260 million in annualized rent. No wonder everything is so expensive in Vegas...
Looking at the overview below, we see that VICI is more than just a company that basically owns Las Vegas. Roughly half of its revenues come from regional, non-Las Vegas properties. These properties are also run by the nation's biggest gaming companies, which lowers the risk to VICI shareholders tremendously.
While having a concentrated tenant portfolio comes with risks, the risks for VICI are limited. After all, its tenants aren't going to leave that easily. We're talking about mostly iconic buildings that are the reason why most of these tenants are doing so well.
For example, compared to other triple net lease alternatives, VICI operates with much higher entry barriers, very long average lease terms (>40 years), high-quality tenants (100% rent collection during COVID), low cash flow volatility, and almost all of its contracts come with inflation protection, which also protects shareholders against inflation.
Furthermore, the company has a top-tier balance sheet.
Especially in times of elevated inflation and high rates, healthy balance sheets are key. As of March 31, VICI has a sub-6x net leverage ratio, 99% fixed rate debt, 82% unsecured debt, and 6.6 weighted average years to maturity with no maturities in 2023. This buys the company a lot of time in this unfavorable market environment.
The company also has a consistently rising dividend and a juicy 5% yield.
Since 2018, the company has consistently raised its dividend. Using Seeking Alpha data, VICI has hiked its dividend by 9.4% per year (on average) over the past three years. It maintains a 66% forward FFO (Funds From Operations) payout ratio.
Valuation-wise, we're dealing with a forward P/FFO multiple of 13x, which is in line with the sector median.
In my opinion, that's undervalued as VICI has grown its adjusted FFO by 9% per year over the past three years. The sector median was 1.9%. I expect VICI to outperform its peers on a long-term basis. This requires a valuation premium.
The current consensus price target is $37. That's 18% above the current price. I believe this is a conservative target.
Pick number two is a bit more cyclical but not less attractive.
The Williams Companies ( WMB ) - 5.2% Yield
The Williams Companies is an energy company. In this case, it's a midstream company, which means it connects buyers to sellers of oil, natural gas, and a wide range of other products.
However, unlike most companies in the industry, it is a C-Corp, not a Master Limited Partnership. This means it has no K-1 forms and can be bought by almost all non-US investors as well.
With a $41 billion market cap, the company is the 6th-largest midstream company in North America and boasts an impressive portfolio of assets, including interests in over 33,000 miles of pipelines across 25 states.
The company also owns and operates 29 natural gas processing facilities and seven NGL fractioning facilities, providing it with substantial leverage in the market.
Williams also owns roughly 24 million barrels of NGL storage capacity and 290.4 billion cubic feet of natural gas storage capacity.
A critical aspect of Williams' operations revolves around its interstate natural gas pipelines, which fall under the watchful regulation of the Federal Energy Regulatory Commission (FERC).
Rates for these pipelines are determined either through the rate-making process or via negotiation with customers.
Notably, the majority of Williams' transmission businesses operate under long-term firm contracts, while storage and interruptible transportation services are provided through shorter-term agreements.
Having said that, Williams has adopted a revenue generation strategy that revolves around both fee-based contracts and non-cash commodity-based contracts.
These agreements are generally long-term, often incorporating cost-of-service mechanisms to adjust gathering rates.
This allows the company to steadily grow its business without being directly dependent on the price of the commodities that flow through its system. The biggest risks are recessions that get so bad that final demand falls or a situation where prices are so weak that drilling activities are halted.
However, even during the pandemic, the company saw steady volumes and EBITDA.
It also has a healthy balance sheet.
Its BBB-rated balance sheet comes with a 3.65x net leverage ratio and no meaningful maturities in 2023.
The average weighted maturity is 11.4 years. The average weighted yield on its debt is 4.8%.
Having said that, WMB yields 5.2%.
- Over the past five years, the dividend has been hiked by 6.4% per year.
- On March 9, the company hiked the dividend by 5.3%.
- The dividend is protected by a dividend coverage ratio of 2.65x (based on adjusted funds from operations).
On a full-year basis, the company expects the dividend coverage ratio to remain 2.3x, which is based on a $200 million increase in CapEx.
With that in mind, since cutting the dividend during the energy crash of 2014/2015, the dividend has steadily been hiked. Unless we get another scenario where energy prices crash so much that the market fears imploding output, I'm fairly certain that we're dealing with a very safe high-yield investment.
Also, bear in mind that we're now in a different situation.
Oil and gas production has declined since the pandemic. While output is still growing, we're seeing tight supply, which has put a floor under prices, making it extremely unlikely that prices could see the kind of drops again we had to deal with in 2015 and 2020.
Additionally, capital requirements in the industry are lower. It's a much more mature industry now, which can absorb a lot of economic weakness.
WMB is trading at 10.4x forward EBITDA, which is fair. I believe that the stock has 10% to 15% upside potential.
While I currently do not focus on income-generating investments, I would be a buyer on the next 10% correction.
Please be aware that while WMB is finally stable, it is a bit more volatile than non-energy high-yielding stocks- Please keep that in mind when doing your own due diligence.
Takeaway
For income-seeking investors, it's crucial to find investment opportunities that offer not only long-term capital gains but also reliable income. With the retirement wave accelerating, the need for high-quality income investments has never been more important.
Two stocks worth considering are VICI Properties and The Williams Companies.
VICI, America's largest leisure-focused REIT, boasts a unique advantage with its ownership of iconic Las Vegas properties and a diversified regional portfolio. Its triple net lease model, top-tier balance sheet, and steadily rising dividend with a 5% yield make it an attractive choice.
On the other hand, WMB, a midstream energy company, connects buyers and sellers of oil and natural gas. With impressive assets and a strategic revenue generation strategy, it maintains steady growth and a 5.2% yield. While slightly more volatile, WMB offers a safe high-yield investment.
Going forward, I'll discuss more of these opportunities, so don't hesitate to comment if you have questions and/or suggestions!
For further details see:
Get Paid: 2 Stocks Yielding 5% To Elevate Your Income