High Yield Or Dividend Growth? Both!
So often in life, you have to pick one or the other. Today, you don't have to.
I invest for income - a steady inflow that will pay for my retirement.
We discuss two discounted yields for steady retirement income.
Life is often filled with choices of being able to have one item or the other, not both. We've been so accustomed to this throughout our lives that we rarely consider the possibility of having both in one.
When it comes to the market, especially the section that focuses on dividends, we typically find two groups of investors. The first kind seek regularly growing cash inflow and typically buy very low-yielding investments with the expectation of rapid growth over time. And then there are investors who want large cash dividends now, and are willing to accept no dividend growth.
Today we look at two investments that successfully do both. Let us dive into the possibility of getting big dividends now with regular raises in the future.
Pick #1: EPD, Yield - 7.4%
Enterprise Products Partners LP (EPD) is one of the largest midstream companies in the U.S.and a critical player in the safe delivery of raw materials essential for everyday life, as ~96% of all manufactured goods have something to do with petrochemical feedstock. EPD runs a highly inflation-resistant business, supplying commodities to credit-worthy customers with long-term fee-based contracts and built-in price escalators to combat rising costs and maintain profitability.
EPD ended Q2 with an industry-leading leverage ratio of 3x. Ninety-six percent of EPD’s debt carries fixed interest rates, with a comfortable ~20-year weighted average maturity duration and a weighted average interest rate of 4.6%. In July, EPD raised gifted shareholders with a 2% quarterly distribution raise, and its current annualized $2/share distribution calculates to a healthy 7.5% yield. This raise reflects the 25th consecutive annual increase, making it an unparalleled feat in the midstream industry.
EPD insiders hold a significant portion (32%) of the common units, indicative of management’s long-term perspective rather than a desperate focus on immediate results.
Pick #2: VZ, Yield - 7.8%
Telecom is a competitive industry in the United States, dominated by three companies - AT&T (T), Verizon (VZ), and T-Mobile (TMUS). While this isn’t an industry that is going to see dramatic growth, it brings stable, recurring, and well-protected cash flows to the table.
VZ is likely to be targeted by various litigation surrounding its lead-sheathed cables, with details of the first class-action lawsuit here. Whether or not the company will be found liable, and if they are, how high the damages might be is unknown at this time. And Mr. Market is often fearful of such uncertainty.
People aren't going to stop using their smartphones or internet because of unused lead cables. Nor is the company going to be forced to advertise against its products and services (like in the case of tobacco). The very people suing the company, the lawyers, the judges, and the expert witnesses will ALL be walking into a Wi-Fi connected courtroom with smartphones in their pocket.
Amidst all the noise, VZ quietly did what it is good at, declaring its 17h consecutive annual dividend increase. The company’s $0.665/share quarterly dividend calculates to a healthy 7.8% annualized yield. VZ is a cash cow, well-positioned to pay out large growing dividends for the foreseeable future.
This is a situation where you don't have to pick one or the other, you can have both. When it comes to my retirement investment portfolio, I find comfort by not having to play the game of either/or, but to recognize that both have room in my portfolio.
Your retirement can benefit from the growing dividends offered by both of these discussed companies. This means that you'll see a naturally inflation-resistant, yet continually growing income stream on top of whatever reinvestment you do.
At HDI, we remain committed to the income strategy by efficiently diversifying our income sources across 45+ securities to achieve an overall yield of 9%. This income is intended to support our lifestyle and ensure our financial independence no matter what the market throws at us.