If you're retired, you're probably looking for a solid income stock (or two). One with a material yield backed by a company with a long history of success behind it and a clear outlook for the future. If that sounds like you, integrated energy giant Royal Dutch Shell (RDS.B) and real estate investment trust (REIT) W.P. Carey (WPC 0.49%) are two names that should be on your short list today. Here's why.
1. Looking to the future
Shell is offering investors a robust 5.8% dividend yield today. That's toward the high end of its peer group and well more than the roughly 2% you would get from an S&P 500 Index fund. Although the dividend hasn't been increased since 2014, there are some good reasons for that. First, there was a deep oil price decline in mid-2014 that led Shell to take a cautious approach to ensure that it could cover both capital investments and the dividend. Second, it made a large, opportunistic acquisition in 2016 during the industry downturn that roughly doubled its long-term debt.
Since that acquisition, Shell has been focusing on reducing leverage and shifting its business mix. The goal is to prepare for a future in which oil, natural gas, and electricity are all major pieces of the energy giant's operations. This is why Shell is such a great option for a retiree; it's preparing now for a future in which renewable energy is an increasingly important part of the energy landscape. That effort has included acquiring things like electric fueling stations and investing in renewable power assets.
But what about that debt pile? Shell's long-term debt peaked at roughly $83 billion in early 2017. By the end of 2018, it had trimmed that figure to a little under $67 billion, a nearly 20% decline. That drop was fueled by asset sales management made to help shift the business mix. And while long-term debt makes up roughly a quarter of the capital structure, Shell has a long history of carrying a huge cash balance to ensure it doesn't have to worry about oil-price volatility. At the end of 2018, it had nearly $27 billion in cash. In the end, Shell is a rock-solid energy giant that's shifting along with the world's changing power mix.
Eventually, Shell will whittle its debt down to a point where dividend increases will again be a part of the equation. But until then, you can collect a yield toward the high end of the industry from one of the sector's most proactive players.
2. Diversified like no other REIT
W.P. Carey offers investors a 5.2% yield, which is notably higher than peers like Realty Income, which is currently yielding just 3.7%. But that's not the only difference, here.
Carey operates in the net lease sector, which means lessees pay most of the costs of the properties they occupy. Carey generally buys critical assets directly from companies and then instantly leases them back under long-term agreements. It's more of a financing arrangement in which the lessee gets to raise cash that it can put back into its business (to fund expansions and acquisitions, or pay down debt), and Carey gets a dedicated customer. Carey focuses on originating these deals so it can control the terms and, normally, get better lease rates.
None of that is exactly unique. What is unique is that, unlike peers that generally favor retail assets, Carey has long focused on having a widely diversified portfolio. Office properties make up roughly 25% of its rent roll, industrial 23%, warehouse 21%, retail 18%, and "other" the rest. That's more diversification than any of its major peers can offer, but it doesn't stop there. Carey is also globally diversified, with around two-thirds of rents from U.S. properties, and the rest from foreign markets -- largely Europe. The REIT's unique diversification allows it to put money to work wherever it finds the best opportunities, which pairs very well with its focus on opportunistic deals in which it can control the lease contract.
Carey also has a long history of rewarding investors well, increasing its dividend for 22 consecutive years. The dividend growth rate can vary greatly from year to year since Carey pretty much refuses to participate in markets that it doesn't believe offer value. For example, it has minimal exposure to U.S. retail. Still, over the past decade, the annualized rate of dividend growth was a solid 7% or so.
Carey has recently been simplifying its business, shutting down an asset management division and buying non-traded REITs that it ran. That process is largely complete, and investors are starting to get more comfortable with its new, easier-to-understand business model. If you act now, though, you can still collect a fat yield while Carey continues to prove that it's every bit as good, if not better, than the net lease bellwethers that get all of the attention.
Don't wait around
Shell and W.P. Carey are high-yielding names within their respective niches. And both have taken unique approaches that should serve them well in the future. If you are retired and looking to generate some income from your portfolio, these two stocks should be on your short list. Once you dig in a little, you're likely to find that one or both have a place in your retirement portfolio.