Your portfolio says a lot about you: It can reflect how you view the world or reveal the objectives you want to accomplish. As you reach retirement age, your portfolio is likely going to include more conservative investments that have more modest growth prospects but generate lots of cash from dividends.
Considering the importance of income generation, we asked a few of our investing contributors to each highlight a stock they see as a great fit for a retirement portfolio. Here's why they picked Iron Mountain (NYSE:IRM), Pembina Pipeline (NYSE:PBA), and NextEra Energy Partners (NYSE:NEP).
Rock-solid investment opportunity
Rich Duprey (Iron Mountain): Few companies offer investors as much potential long-term growth opportunities at relatively little risk, all the while paying a healthy dividend, as does data storage specialist Iron Mountain.
The real estate investment trust is required to pay out the vast majority of its profits as dividends to investors. Management maintains it will be able to grow adjusted funds from operations 8% over the next three years, as well as boost adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by a similar rate. It also anticipates that its dividend will grow 4% annually over the next three years.
It derives nearly two-thirds of its revenue from North American operations, but it continues expanding globally. Just last week the company announced it had acquired five Chinese facilities from Santa Fe Group -- raising its total in the country to 11 -- that add 700 customers with storage volumes that include 1 million cubic feet of records and 51,000 data-protection assets.
Protected by its broad geographic diversity and having few competitors that can match the broad mix of services that it offers (it's acquired many of its major rivals over the years), it stands as a giant in its field. Its shares have risen 25% year to date, and the stock trades at a premium valuation -- but as the industry leader that serves 95% of Fortune 1000 companies, it probably deserves to be richly valued.
The dividend of $2.35 per share currently yields 5.8%, providing retirees a productive source of income with the promise of further capital appreciation to come.
A big payout now with lots of options for the future
Tyler Crowe (Pembina Pipeline): The sector encompassing oil and gas pipelines, logistics, and processing assets is one of the highest-yield spaces out there. It's a business that requires a lot of up-front capital to build assets that can generate cash flows for decades, with minimal maintenance capital. A well-run pipeline company can throw off gobs of cash to investors, and Canadian pipeline giant Pembina Pipeline is arguably among the better investments in this industry.
One of the impressive accomplishments of Pembina, that suggests it is indeed one of those well-run businesses, is the recent completion of a massive investment plan that has significantly grown the business. Two years ago, the company's committed growth capital plan was equal to 35% of its total enterprise value. Since then, the company has brought more than 6 billion Canadian dollars in projects into service, as well as completed a CA$9.7 billion acquisition of Veresen, another Canadian pipeline company. Many companies have committed to growth plans that tend to require taking on substantial debt, but Pembina has managed to maintain an investment-grade credit rating and a debt-to-EBITDA ratio of 3.5, well below its peers'.
As it stands today, Pembina's stock has a dividend yield of 5% (it varies slightly since the dividend is in Canadian dollars). The payout is likely to increase significantly in the coming quarters since the company has completed CA$4.4 billion of those projects in the past six months. With another CA$20 billion in potential projects, there is significant growth for this steady pipeline stock that should entice income investors in their retirement.
An energy dividend that's built to last
Travis Hoium (NextEra Energy Partners): Investing in retirement is all about preserving capital and generating consistent cash flow. That's why NextEra Energy Partners is a perfect stock for retirees in 2017.
NextEra Energy Partners is what's known as a yieldco, a company that owns renewable energy assets and generates cash from electricity sold to utilities, which is then returned to shareholders in the form of a dividend. Today, NextEra Energy Partners' dividend yield stands at 4%, but it's got a lot of growth potential ahead.
Yieldcos increase cash flows and dividend payouts by buying more projects, which can be funded with excess cash and/or by issuing new shares and debt. NextEra Energy Partners is in the unique position to be able to do a little bit of both.
At the end of 2017, management projects that it will have 20% more cash available for distribution than the amount needed to cover the anticipated annualized dividend of $1.58 to $1.62 per share. The dividend yield of 4% also means that equity financing would be a relatively cheap way to fund growth, particularly in comparison to other yieldcos with dividends exceeding a 7% yield. Either excess cash or stock can fund future dividend growth, which management still expects to be 12% to 15% through 2022.
If you're looking for a steady company with a rock-solid dividend, NextEra Energy Partners is a great pick. And it offers a surprising amount of growth for investors as well.
Rich Duprey has no position in any of the stocks mentioned. Travis Hoium owns shares of NextEra Energy Partners. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.