Investing when you are young is generally focused on growing your nest egg. And as you near retirement, that starts to change to a goal of living off your savings. Doing that can be a lot easier if you focus on dividend-paying companies backed by stable businesses. Here are three high-yield stocks that fit that bill: Magellan Midstream Partners LP (MMP -0.54%), Duke Energy Corporation (DUK 0.06%), and Procter & Gamble (PG 0.33%).
1. Moving energy, for a fee
Magellan is a midstream limited partnership with a largely fee-based business that helps move oil and gas from where it's extracted to where it eventually gets used. This involves hard-to-replace assets that are vital parts of the U.S. energy infrastructure. The partnership sports a yield of 5.3% and has increased its dividend every quarter since its IPO in 2001. Management's distribution-coverage target is a robust 1.2 times, providing plenty of safety for income investors.
The partnership has big plans, spending $2 billion between now and 2020 on capital projects. That is expected to lead to distribution growth of roughly 8% in 2018 and between 5% and 8% in 2019 and 2020, well above the historical rate of inflation. It is one of the most conservative midstream partnerships, and tends to line up customers for projects before it starts building. In other words, Magellan looks like a great high-yield option for investors focused on living off the income their portfolios generate.
2. A boring old utility
Duke Energy is a U.S. utility with operations in electricity (roughly 90% of second-quarter earnings), natural gas (4%), and a small renewable merchant power business (6%). It is, largely, a traditional utility that has been awarded a monopoly in the regions it serves. But in exchange, it must get rates approved by regulators. It has been a boring, slow-growth business for a very long time. The yield is currently around 4.6%, and the dividend has been increased every year for 14 consecutive years.
Pretty much the only way for a regulated utility to get its rates approved is to spend money on upgrading its system. Duke plans to spend $37 billion across its various businesses between 2018 and 2022 (nearly 80% is earmarked for its electric business). It expects that to lead to earnings growth of 4% to 6% a year over that span, with dividend growth of roughly the same amount. It is targeting a 70% to 75% payout ratio. That may sound high at first, but as a utility, it provides a necessity to millions of customers and can support such a high payout. Duke is the kind of company that can provide a solid cornerstone to a diversified dividend portfolio.
3. A little trouble, but worth it
The Procter & Gamble Company is a consumer products giant with a $200 billion market cap. Its industry leading brands include Bounty and Gillette, among many others. It has a robust, global distribution network and an incredible history of using research and development to introduce new products, for which it can charge premium prices. The stock's yield is currently 3.5%, toward the high end of its historical range. The company has increased its dividend annually for an incredible 62 years.
Right now P&G is going through a rough transition as it adjusts to customers' shifting demands for "natural" products, new competition, and the growth of internet shopping. More recently, input and transportation costs have been rising, leading to a concern that profit margins will be weak. The stock is down around 10% over the past year versus a roughly 16% gain for the S&P 500 Index. Investors are clearly worried about the future, but those fears are likely overblown.
To address the issues it is facing, Procter & Gamble has refocused on its core brands, and is introducing new on-target "natural" products. It has been aggressively taking on new competitors, and will eventually pass rising input costs on to customers, as it has before.
The upshot is that P&G is over 100 years old and has adjusted to the changing markets it serves many times before; it is highly likely to do so again. And with long-term debt at just 30% or so of the capital structure, it has plenty of financial leeway to make the changes it needs. P&G is a more aggressive option for a 60-year-old investor. But it's worth the extra uncertainty to buy an out-of-favor company with an incredible history of rewarding shareholders via annual dividend hikes.
A time to re-examine your portfolio
If you are in your 60s, it is highly likely that you are rethinking your financial goals. If that includes refocusing on income generating stocks, then you are sure to find Magellan, Duke, and Procter & Gamble interesting. In fact, I'm fairly certain that you'll find one or more of these high-yield stocks a great addition to your dividend portfolio if you take the time to do a deep dive.