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3 Stocks to Bankroll Your Retirement

By Matthew DiLallo - Mar 29, 2020 at 8:48AM

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These stocks could energize your retirement income.

The recent market meltdown resulting from the worsening COVID-19 outbreak has created a cloud of uncertainty. Many people aren't even sure if they'll have jobs in the coming weeks, let alone if they'll ever be able to retire. That makes it a challenging time to invest.

However, as long as you have a sizable emergency fund, this could be a great time to buy stocks with retirement in mind. Three top options to consider are pipeline giants TC Energy (TRP 0.20%)Kinder Morgan (KMI 1.20%), and Williams Companies (WMB 0.71%). They've all sold off sharply in recent weeks, which has pushed their dividend yields up to attractive levels.  

A roll of hundred dollar bills next to a sign reading dividends.

Image source: Getty Images.

Built to keep risk at bay

Shares of TC Energy have declined by about 25% during the recent market rout. That pushed the yield on the Canadian pipeline company's dividend up to around 6%.

That payout appears to be sustainable even if energy market conditions remain weak for a while because of the company's low-risk business model. For starters, the company generates stable income because fee-based contracts and regulated rates lock in about 92% of its annual earnings. That leaves only about 8% of its cash flow with any exposure to volumes or commodity prices. Meanwhile, TC Energy only pays out about 40% of that cash flow to support its dividend, which is a conservative level for a pipeline company. On top of that, TC Energy has a strong investment-grade balance sheet, which, when combined with its retained cash, provides it with lots of financial flexibility. Because of those factors, TC Energy's dividend appears built to endure these tough times, which means it should be around to help bankroll an investor's future retirement.

In its best financial shape in years

Kinder Morgan's stock has shed about 35% of its value from the peak earlier this year. That sell-off drove its yield above 7%.

That high-yielding payout also appears to be on a sustainable foundation. That's because Kinder Morgan generates relatively stable cash flow. Overall, take-or-pay contracts -- which entitles it to payment even if customers don't use the capacity -- supply 64% of its earnings. Meanwhile, another 27% comes from other fee-based agreements, which only have some slight volume exposure. The final 9% has some direct exposure to commodity prices, though it has hedging contracts in place that lock in prices on more than half of that income.

Kinder Morgan expects to pay out about 57% of its projected cash flow in dividends this year, assuming it goes through with its planned 25% increase. It will use the rest of its cash to invest in additional fee-based expansion projects. However, thanks to its strong balance sheet, Kinder Morgan estimates that it has an additional $1.2 billion of financial flexibility this year, which it could use to repurchase some of its beaten-down stock or invest in other growth-related initiatives. That rock-solid financial profile makes Kinder Morgan's dividend very bankable over the long-term.

A durable business

Williams Companies' stock has shed about 40% of its value during the sell-off. That has pushed the yield on its dividend above 10%. While a double-digit payout usually is a warning sign, that's not the issue here, as it's entirely due to the shellacking in Williams' stock price.

That's quite clear in a recent investor update published by Williams following the nosedive in its share price. The company noted that it has purposefully built its business to be both predictable and durable. It pointed out that most of its earnings come from long-term fee-based contracts that have limited exposure to the current market conditions because they're either with gas producers (where pricing has risen) or end-users like utilities. Meanwhile, more than 90% of its customers have investment-grade credit ratings, which is a sign of financial strength. Williams therefore believes it will generate about $5 billion in earnings this year. While that's toward the lower end of its guidance range, it's enough to cover its high-yielding dividend by about 1.7 times, which is around a 60% payout ratio. On top of that, Williams has lots of liquidity -- cash and borrowing capacity -- to refinance upcoming debt and fund its expansion program, with capital expenses likely coming in at the bottom end of its guidance range. It therefore has the financial strength to maintain its high-yielding payout throughout this downturn.

Sustainable dividends on sale

The turbulence in the stock market has created opportunities for long-term investors to buy high-quality stocks at unbelievable prices. Among the more compelling ones are top-notch pipeline stocks, which have sold off in recent weeks. Now long-term focused investors can pick up some attractive income streams to help bankroll their retirement.

Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Williams Companies, Inc. Stock Quote
The Williams Companies, Inc.
WMB
$32.45 (0.71%) $0.23
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
KMI
$17.68 (1.20%) $0.21
TC Energy Corporation Stock Quote
TC Energy Corporation
TRP
$49.19 (0.20%) $0.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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