With the major U.S. indexes on the brink of a bear market, many retirees are likely wondering if they should swap their dividend stocks for safer income investments like bonds. That strategy might work for older retirees, but younger retirees can consider buying some well-known dividend stocks after the recent correction boosted their yields and reduced their valuations. Today a trio of our Motley Fool investors will highlight three stocks that fit the bill -- Philip Morris International (PM 0.02%), LTC Properties (LTC 0.36%), and American Water Works (AWK -0.11%).
A beaten-down tobacco giant
Leo Sun (Philip Morris International): Philip Morris International was spun off from Altria Group (MO -0.10%) over a decade ago, with PMI retaining Philip Morris's overseas businesses and Altria retaining its domestic operations. That split enabled PMI to focus more on higher-growth overseas markets.
Like Altria, PMI has been cutting costs and raising prices to offset waning smoking rates in certain markets. It's also diversifying away from traditional cigarettes with alternative smoking products like IQOS, which heats HeatSticks instead of burning them. But unlike Altria, PMI doesn't usually repurchase its own shares to buoy its EPS growth, due to volatile exchange rates and the need to repatriate its overseas cash.
During the first nine months of 2018, PMI's retail market share rose 30 basis points to 38.4% and its shipments (excluding the impact of trade inventory movements) rose 0.3% -- as a 42% jump in heated tobacco units offset a 3% decline in traditional cigarettes. Analysts expect its revenue and adjusted earnings to rise 3% and 5% next year, respectively, and it trades at just 13 times forward earnings.
PMI's forward yield of 6.8% is also at a historic high due to the stock's 33% decline over the past 12 months. PMI has raised that payout every year since its split with Altria, and it spent just 81% of its free cash flow on those payments over the past 12 months -- which gives it room for future hikes. The combination of PMI's stable core business, its low valuation, and a high yield make this a solid dividend stock for retirees.
Check out the latest Philip Morris International earnings call transcript.
Invest in what you know -- and need
Dan Caplinger (LTC Properties): Investors who are retired typically need income to pay their living expenses, most of which come in the form of monthly bills. Accordingly, a dividend stock that makes monthly payouts to its shareholders is ideal, and real estate investment trust LTC Properties is a natural choice that serves the retiree demographic in a way that older investors can truly appreciate.
As its name suggests, LTC Properties owns and operates long-term care and senior housing developments. With more than 200 skilled nursing and assisted living properties from coast to coast, LTC Properties has more than 25 years of experience in building and managing a high-quality portfolio of healthcare-related real estate.
That's led to consistent and healthy dividend payments to shareholders. LTC currently carries a 5.5% dividend yield, paying out $0.19 per share monthly. The REIT has also regularly increased its dividend, with 10 boosts since LTC switched from quarterly to monthly dividends back in 2005.
Given demographic trends, the market for senior housing is seeing a lot of demand, and that should help LTC keep its portfolio growing in the years to come. That should help support dividends and make LTC a smart holding for retiree investors for a long time.
Check out the latest LTC Properties earnings call transcript.
Slow and steady growth you can count on
Maxx Chatsko (American Water Works): A dividend yield of just 2% may not be terribly impressive as far as income investors are concerned, but shares of American Water Works make up for that in an even more important metric: long-term total return. When stock performance and dividends are combined into one measure of growth, shares have delivered a 10-year total return of 475% (and 335% when dividends are excluded). The S&P 500 total return sits at "only" 239% in the last decade.
While past performance isn't always indicative of future performance, American Water Works is well positioned to continue delivering for shareholders. The nation's largest water utility operates in a highly regulated market, which means the business can continue to earn higher rates from customers over time so long as it makes capital investments to improve water infrastructure. That boring cycle of investments, rate increase applications to state regulators, and rate increases has resulted in impressive long-term returns -- and it will remain intact for the foreseeable future.
American Water Works invested $1.1 billion in its regulated businesses through the first nine months of 2018, added 16,500 customers through acquisitions and new water line additions, and had 56,000 additional new customers waiting to enter the system from pending acquisitions. All that means a healthy amount of growth potential in the years ahead, similar to what investors have come to expect. Case in point: at the end of September the business was on pace to achieve full-year 2018 adjusted EPS of approximately $3.30, marking a 9% increase from the year-ago period.
That boring continuation of slow and steady growth might be bolstered by more exciting opportunities going forward. The company is now using drones and artificial intelligence to conduct lower-cost, safer inspections of aboveground water tanks -- a move that could save millions of dollars per year. Meanwhile, in April 2018 American Water Works acquired Pivotal Home Solutions, a provider of warranty contracts for home appliances, heating and cooling systems, and gas and water lines on residential properties. The move expanded the company's complementary business offerings and provides an important source of non-regulated revenue for the future.
Simply put, owning stocks with a history of beating the returns of the broader market can deliver peace of mind in retirement while still allowing your savings to appreciate in value. That makes American Water Works worth a closer look.
Check out the latest American Water Works earnings call transcript.