Chasing yield is a risky endeavor for any investor, but more so for those seeking to use the stock to retire upon. But when you can find stocks that offer both safety and reliability -- and sport high dividend yields -- then it's time to take a closer look.
Three Motley Fool investors have recommended AT&T (T +0.07%), Verizon Communications (VZ +0.15%), and Iron Mountain (IRM +2.33%) as stocks that meet those criteria. Read on to see why they'd make perfect stocks for retirement.
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Ringing the bell for retirees
Keith Speights (AT&T): The days of AT&T being known as Ma Bell are long gone now. However, with a dividend yielding 5.36%, the telecommunications giant's stock should still ring the bell for retired investors looking for a great source of reliable income.
It's not just AT&T's high yield that's attractive. The quality of the company's dividend is also a big plus. AT&T has increased its dividend for 33 consecutive years, landing it a spot among the elite group of stocks known as Dividend Aristocrats. Although the telecom leader currently spends more than 90% of earnings to fund the dividend program, its strong cash flow should keep its streak of dividend hikes going well into the future.
While dividends are important for retirees, it's also critical that the underlying stock perform relatively well. Should investors be concerned about AT&T shares' double-digit percentage drop so far in 2017? I don't think so. In fact, I think this decline makes the stock a bargain, with shares trading at less than 12 times expected earnings.
AT&T has begun rolling out its high-speed 5G network in several large cities across the U.S., which should allow it to support new technologies like self-driving cars. The company also awaits federal approval of its acquisition of Time Warner. Assuming the deal gets the green light, it could position AT&T to be a key player in wireless cable services. I think that AT&T's earnings growth will improve in the coming years, which should make its dividend even more of a good bet.
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Telecoms are once again a dividend investor's playground
Brian Stoffel (Verizon Communications): Like Keith, I also think that the country's major telecom companies are an excellent place to hunt for solid dividends in retirement. While I'm nowhere near retirement -- and wouldn't qualify myself as a dividend investor -- there's a lot to like at Verizon.
Currently, the company has the largest slice of the U.S. wireless market, with a 36% share, according to Statista. Keith's pick of AT&T is a close second, and T-Mobile is quickly gaining ground. But the latter is realizing now that with Verizon mimicking its move into unlimited plans, the moat around it might be shrinking. And while AT&T has a higher brand value, according to Forbes, Verizon's no slouch, either: It's 19th in the nation with a brand worth $29 billion.
As part of fending off T-Mobile and other potential upstarts, Verizon is expanding its offerings to become an integrated media company, acquiring Yahoo!'s media properties and AOL. That has put a damper on free cash flow. But that shouldn't continue indefinitely. If we take the company's average free cash flow for the past three years ($13.4 billion), today's dividend -- yielding over 5% -- eats up just 83% of that cash flow.
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Like a rock
Rich Duprey (Iron Mountain): Although data breaches have become seemingly commonplace these days, the massive security failure at Equifax that exposed the most sensitive credit information of 143 million Americans woke many to the real risks they face by having so much of their personal information out there.
Iron Mountain is an enterprise data management services provider. It has global reach, with more than 1,400 facilities housing 89 million pieces of media and 1 billion medical images. The company has 682 million cubic feet of space dedicated to storing hard copies of critical corporate documentation in 52 countries. The safety and security of this information is of paramount importance, and it boasts an inventory accuracy rate of 99.99999%.
Structured as a real estate investment trust, Iron Mountain is required to pay out the vast majority of its profits as dividends to investors. Management's plan for the next three years includes driving adjusted funds from operations 8% higher as well as increasing adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by a like amount. It also anticipates that its dividend will grow 4% annually over the next three years.
Currently, Iron Mountain's payout of $2.20 annually yields 5.8% based on its current stock price. That ought to make retirees feel secure that this data-protection company will continue protecting their payout every bit as much as the data 95% of Fortune 1000 clients entrust to it.
