If you recently retired, you're probably looking for stocks with low volatility and high dividends. Low interest rates have recently inflated the value of many dividend stocks to unattractive levels, but there are two solid income investments which I believe retirees can still consider buying -- Cisco (CSCO +1.99%) and Bank of America's Preferred L shares (NYSE: BAC-L).
Image source: Getty Images.
An underappreciated tech stock with a solid yield
Networking giant Cisco is only expected to post 1% sales growth this year and 3% growth next year. That stagnation is mainly attributed to slowing demand for its routers and switches, which generated nearly half its revenue last quarter. Router sales slid 6% annually during the quarter, but switch sales improved just 2%. Meanwhile, newer cloud-based networking solutions from companies like Arista Networks threaten to reduce sales of Cisco's on-site networking hardware.
Cisco's core business might look mediocre, but the company has been aggressively expanding its higher-growth security, service provider video, and collaboration services businesses. It also inked major enterprise partnerships with Apple, IBM, and Salesforce to widen its moat against smaller challengers, and made numerous acquisitions to expand inorganically across the growing Internet of Things -- which could connect up to 50 billion devices by 2020.
Cisco generates plenty of free cash flow ($12.4 billion over the past 12 months) for funding acquisitions, buybacks, and dividends. It respectively spent 22% and 38% on buybacks and dividends over the past year, indicating that it has plenty of room to increase both to boost shareholder value. Buybacks are expected to increase Cisco's earnings by 3% this year and 6% next year. Cisco hiked its dividend annually for the past five years and currently pays a forward yield of 3.4% -- which is much higher than the S&P 500's average yield of 2.1%.
Lastly, Cisco trades at just 15 times earnings, which is much lower than the industry average of 25 for networking and communication device companies. That low valuation and its solid yield should set a floor under the stock -- making it a low-risk, long-term investment for most retirement portfolios.
A preferred stock with unusual benefits
Bank of America (BAC +0.78%) offers a wide variety of preferred shares which are less volatile and pay higher dividends than its common shares. Moreover, if Bank of America became insolvent, preferred shares could be redeemed at a "par value" like bonds, while common shareholders might lose everything. Therefore, the par value represents a good safety net for retirees, many of whom likely remember that the global financial crisis wiped out many major bank stocks.
The trade-off is that preferred shares have less upside potential than common shares, since they become less attractive as they rise above those par values. Moreover, many preferred shares can be redeemed, meaning that Bank of America can buy back those shares at par value at any time past their redemption dates.
The L-series preferred stock is an exception to that rule. The stock has a par value of $1,000, but can't be redeemed by Bank of America at any time. However, Bank of America can convert each L share into 20 common shares, if the common shares rise above 130% of $50 ($65) over 20 of 30 consecutive trading days. That probably won't happen anytime soon, since Bank of America was trading for about $15 as of this writing.
Therefore, the 130% figure indicates that each L series share could eventually be converted into $1,300 worth of stock (20 shares of the common stock at $65). So as long as the L series stock remains below $1,300, as it is now, it trades at a discount to its long-term value, even though it has an "uncallable" par value of $1,000. Meanwhile, the L series stock pays quarterly dividends for a 5.9% annual yield -- more than triple the common stock's yield.
Growth-oriented investors will probably accept the lower dividend of Bank of America's common shares in exchange for higher potential price growth. However, I believe that the L-series preferred shares are better suited for retirees, because they offer more predictable prices with a much higher yield.
The key takeaway
Cisco and Bank of America's L series stock aren't exciting investments for growth-oriented investors, but they offer stability and generous income -- two qualities which will serve retirees well in their golden years. However, investors should also do their due diligence and fully understand the benefits and drawbacks of ETFs, covered calls, and prefered stock before buying any shares.
