As the yield on the 10-year U.S. Treasury Bond fell below 1% in early March, retirees looking for stable investments for their income were desperately looking for alternatives that could provide a well-performing dividend yield and help generate decent -- and safe -- income for their retirement funds. The coronavirus pandemic has created problems for investors who are chasing safe dividends, as many otherwise strong companies have been unexpectedly hit and forced to announce the suspension of share repurchases and dividend payouts in the past month to keep operating in what is clearly a recessionary economy.
To help retirees in the search for stable income-oriented investments, here are three companies that appear capable of weathering the COVID-19 pandemic and continue to protect their dividend payouts over the long-term -- giving retirees who rely on these funds some shelter during this economic storm.
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1. Duke Energy
Regulated utility companies rely on government contracts for pricing, which can limit their earnings upside but gives the utilities an advantage during economic downturns. Revenue is consistent from year to year instead of fluctuating significantly from day to day, and most contracts provide an allowance for a "reasonable profit" agreed upon between the government entity and the utility.
Duke Energy (DUK 0.07%) isn't small by any means. Servicing 7.8 million customers in a territory that totals more than 91,000 square miles and generating 51,144-megawatt capacity, Duke is a large player in the Midwest and Southeastern U.S. The company has a well-diversified energy portfolio of 29.2% natural gas and oil, 28.6% nuclear, and 21.6% coal.
Growth in operating revenue has been consistent, rising at a 2.31% compound annual growth rate (CAGR) from 2015's revenue of $22.37 billion to 2019's revenue of $25.08 billion. During the same period, Duke expanded its asset portfolio at a 5.57% CAGR from $121.16 billion in 2015 to $158.84 billion in 2019.
Increasing assets further, Duke Energy announced during the recent 2019 annual report that the company plans on increasing the originally projected capital project budget from $50 billion to $56 billion between 2020 and 2024. This plan is expected to generate growth in earnings between 2020 and 2024 within 4% and 6%.
Considering Duke Energy as an investment right now is also good timing, as Duke Energy's share-price valuation is trading at 16.52 forward price-to-earnings against the sector median of 19.18. A large benefit to owning Duke Energy is its forward dividend yield of 4.42%, growing for nine years with a three-year CAGR of 3.68%.
Industrials historically carry high debt to fund assets, which is why Duke's debt-to-EBITDA (a ratio to measure the years in earnings needed to pay off debt) is 6.03. This debt burden would be cause for concern in any other industry outside of utilities (utilities need to invest significantly in assets to generate growth). Also, the regulated contracts utilities sign ensure steady revenue and reduce the overall risk that comes with a large debt load.
The share price of Duke Energy has weathered the coronavirus pandemic, with a year-to-date share price decrease of 2.7% in comparison to the S&P 500 decrease of 12.7%. Volatility protection in addition to a high-yield dividend gives retirees good reason to hold Duke Energy for the long-term horizon.
2. Intel Corp.
Intel's (INTC 1.77%) share price was recently upgraded to "market perform" by a Raymond James analyst, stating that Intel is well-positioned during the coronavirus pandemic. A survey from Steam Hardware & Software showed that Intel holds the bulk of PC processor market share at 81.3% in March, which is a gain of 3.1% from February. Intel will continue to benefit as employees continue to work from home, students attend school online, and computing becomes more popular in general.
Intel has impressed shareholders over the last five years, improving the operating margin 5.2 percentage points from 26% in 2015 to 31.2% in 2019. The net income margin has improved at a faster pace, gaining 8.6 percentage points during the same period from 20.6% in 2015 to 29.2% in 2019 -- showing an increase in profitability.
Considering the safety of the 2.31% forward dividend yield Intel offers, the company has a debt-to-EBITDA of 0.65 in addition to an impressive interest coverage of 64 times -- both ratios showing that Intel's balance sheet is stable. Dividend growth has been growing over the last 17 years running, with a five-year CAGR of 6.96%. However, the current economic climate may slow the growth for the next few years as the company focuses on capital preservation, which is why Intel recently announced the suspension of the $20 billion planned-share repurchase program, already 38% complete.
Currently, shares of Intel are trading at a discount in relation to the sector median, with a forward price-to-earnings of 11.88 in comparison to the sector average of 20.62, which is understandable given Intel's year-over-year revenue growth of 1.58% and a five-year CAGR of 5.19%. Intel projects 2020 as a turnaround year for the company, forecasting $73.5 billion in revenue and an adjusted EPS of $5.00 -- a 6.2% year-over-year growth.
Controlling the bulk of the PC processer market, increasing profitability, and stable growth are reasons to own Intel during retirement. There are higher-yielding companies in the market currently. However, Intel offers growth -- in addition to a stable dividend -- as computing becomes highly necessary during the pandemic.
3. AT&T
Operating under a well-diversified revenue stream in several markets, telecom giant AT&T (T -1.37%) has become a media conglomerate generating $181.19 billion in revenue in 2019. Acquiring Time Warner and DirecTV left the company with $152.7 billion in long-term debt; however, the company has $12.19 billion in cash on hand in addition to free cash flow of $26 billion in 2019.
This leaves the company with a manageable position even with a debt-to-EBITDA ratio of 3.81, which is in line with AT&T's top competitor Verizon at 3.02. As AT&T paid $37.82 billion toward debt in 2019, the company is aggressively paying down its debt to reduce the leverage, which will increase AT&T's ability to lower the interest rate on current debt and invest in additional projects or acquisitions.
The forward dividend yield is impressive at 6.77%, which has been growing for 35 years straight. However, investors should note that the relatively low five-year dividend CAGR of 2.09% should be expected to continue until the company gets debt under control. AT&T projects 2020 free cash flow of $28 billion and annual growth by $1 billion until 2022 with a projection between $30 billion to $32 billion, which will continue to fund capital projects and protect the dividend.
AT&T's share price is trading at a discount with a forward P/E of 8.76 in comparison to the sector median of 13.33, which gives investors an opportunity to snag shares at a great valuation. There are several concerns surrounding the coronavirus pandemic as AT&T has closed 40% of the total retail stores. However, AT&T generated 77% of revenue from telecommunications, and the company expects overall revenue growth between 1% and 2% between 2020 and 2021, stating that the growth is "driven by strength in the mobility business, increased fiber penetration, and WarnerMedia."
Most consumers these days consider their smartphone plans to be a necessity so dropping them during this downturn is unlikely, which provides recurring revenue protection for AT&T. The rollout of 5G, the upcoming release of HBO Max, and Time Warner's significant portfolio of streaming content will provide growth for AT&T in the long term -- sound reasons to add a high-dividend yielding media conglomerate to any retirement portfolio.
