The current market environment offers some difficulties for people on a fixed income, like Social Security recipients. COVID-19 affected several supply chains and it created artificial shortages for numerous products and services that have caused prices to rise.
Seniors who rely on Social Security benefits for most of their income but have some supplementary retirement income sources may now be discovering that they need to adjust their income sources and find some income-earning stocks to help meet these higher living expenses.
If you need to supplement your Social Security income, here are two stocks with stable business models and decent yields that can help.
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1. Annaly Capital Management: Finding high yields from Mortgage REITs
Annaly Capital Management (NLY +2.80%) is a mortgage real estate investment trust (REIT). These stocks invest in real estate debt (in other words, mortgages) and most closely resemble a bank or hedge fund. If you recently refinanced your mortgage, it was probably guaranteed by Fannie Mae or Freddie Mac, and it might have ended up in a mortgage-backed security on a REIT's balance sheet. These companies use borrowed money to increase their buying power and are able to take your 3% mortgage and turn it into a 10% dividend yield. This use of borrowed money is a double-edged sword in that it magnifies gains and losses.
Annaly invests primarily in mortgage-backed securities that are guaranteed by the U.S. government. This means that even if you default on your mortgage, Annaly will still get its monthly payment. While this may sound like a no-risk trade, that isn't necessarily the case. Last year, as the pandemic lockdowns began, we saw volatility in the mortgage market, which caused some disruptions affecting earnings and dividends. This sort of thing is a fact of life for financials, and these circumstances happen once a decade or so. Annaly was forced to cut its dividend to better manage the situation, but it still has a double-digit yield (currently 10.4%).
Mortgage REITs generally trade right around book value per share, and that metric rises slowly over time. Agency REITs like Annaly tend to be good core holdings for an income investor because the yields are pretty stable. Mortgage REITs won't be millionaire-maker stocks, but they throw off a lot of cash. Annaly's dividend yield is one of the best in the sector, and it cut its dividend by only 12% last year, which was the lowest cut in the sector.
2. Duke Energy: Regulated utilities provide safety and income
Duke Energy (DUK 0.76%) is a regulated electric and gas utility that focuses its operations in the United States on the Southeast and the Midwest. It serves about 25 million customers in six states. Utilities have always been classic income stocks for retirees due to their above-market dividend yields and their stability.
As a regulated utility, Duke Energy has an interesting relationship with the government. Historically, regulated utilities were granted monopolies in exchange for building out the infrastructure in their areas and for accepting additional regulatory oversight. The government gets some say in how much the utility is permitted to charge. Every few years, the utilities would appeal to their respective state public utility commissions and ask for a rate increase. The utility and the regulators would negotiate the permissible rate. The amount the utility is permitted to charge is usually some percentage of its investment in plant and equipment. This negotiation ensures that the regulated utility doesn't price gouge the consumer, but it also ensures that the utility makes money.
Duke has a 3.9% dividend yield and a track record for increasing its dividend payout every year. Utility stocks have always been considered a core holding for income investors. They pay an above-market return and have much lower business risk than tech stocks or consumer discretionary stocks. Given the safety and income, Duke is a great candidate for a retiree looking for supplemental income.
