The 10 Best Stocks to Own for Retirement

The stocks on this list offer an average yield in excess of 4%, have high Dividend Safety Scores, are less volatile than the broader market, outperformed during the last recession, and have increased their dividends for at least 5 straight years. In other words, these are appealing companies to consider owning in a retirement portfolio designed to generate safe, growing dividend income and preserve capital…

Stock #1: Duke Energy (DUK)
Dividend Yield: 4.1% Forward P/E Ratio: 18.2 (as of 7/3/2017)
Sector: Utilities Industry: Electric Power
Dividend Growth Streak: 12 Years

Duke Energy is one of the best high dividend stocks for income-seeking investors, and it’s no wonder why. The company has paid uninterrupted quarterly dividends for 90 years and increased its dividend for the ninth consecutive year in 2016.

Duke Energy’s history dates back to the early 1900s, and the company is the largest electric utility in the country today with over $22 billion in annual revenue and operations reaching across the Southeast and Midwest regions. Duke Energy is a regulated utility company that serves approximately 7.4 million electric customers and 1.5 million gas customers, including customers from its recent $4.9 billion acquisition of Piedmont Natural Gas.

Business Analysis
Regulated utility companies are essentially monopolies in the regions they operate in. With the exception of Ohio, all of Duke’s electric utilities operate as sole suppliers within their service territories. Building and operating the power plants, transmission lines, and distribution networks to supply customers with power costs billions of dollars, and it would generally be unprofitable and inefficient to have more than one supplier for a region.

[ad#Google Adsense 336×280-IA]The downside to the “monopoly” enjoyed by regulated utilities is that their services are priced by state commissions.

This is done to keep prices fair for consumers and allow utility companies to earn a reasonable, but not excessive, return on their investments to encourage them to provide safe and reliable service.

Some states have more generous regulators than others.

Overall, Duke Energy has a strong moat.

The company has excellent scale as the largest electric utility in the country and operates primarily in regions with generally favorable demographic trends and regulatory frameworks.

The non-discretionary nature of utility services also provides stable and predictable earnings throughout the course of an economic cycle.

Management has simplified Duke’s mix to focus on core regulated businesses that provide reliable earnings and new growth opportunities in natural gas and renewable generation resources. While the utility sector is gradually evolving, Duke Energy is here to stay.

Key Risks
Uncontrollable macro factors such as mild temperatures and industrial activity can impact Duke Energy’s near-term financial results. However, we believe these are transitory issues that have little bearing on the company’s long-term earnings potential.

The bigger risks worth monitoring are changes in state regulations, population growth trends in key states, increased environmental regulations, and execution of the company’s business strategy (e.g. large projects and acquisitions). For now, none of these look like concerns.

Over the very long term, electric utility companies will also need to deal with the reality that demand is gradually decaying thanks to increasing energy efficiency and distributed generation (e.g. rooftop solar). Duke has earmarked about $2 billion for growth investments on commercial and regulated renewables over the next five years, but it’s still a relatively small proportion of the overall business. The company’s acquisition of Piedmont should also help the company with growth initiatives outside of regulated electric utility services.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios (learn about the 10 most important financial ratios for dividend investing here). Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Duke Energy’s Dividend Safety Score is 86, which indicates that the company’s dividend payment is extremely safe.

Duke Energy’s excellent Dividend Safety Score is driven by the company’s resilient business, reasonable payout ratio, stable earnings low payout ratios, and excellent credit rating. While Duke Energy’s payout ratio sits near 70%, which is high for some types of companies, it’s not a concern here because of the company’s stability.

Utility companies hold up relatively well during economic recessions, and Duke Energy’s sales fell just 4% in 2009. While customers use somewhat less electricity during periods of weak economic growth, they still need to keep the lights on. DUK’s stock also fared well in 2008 and outperformed the S&P 500 by 15%. Management also raised the dividend.

As we mentioned earlier, regulated utility companies earn very stable earnings as well. As a state-regulated monopoly company selling non-discretionary services, Duke Energy’s earnings have been very stable for many years, providing further support for the dividend.

With that said, the capital-intensive nature of utility companies makes them heavily dependent on debt to run their businesses. However, Duke Energy maintains a healthy A- credit rating with Standard & Poor’s, positioning it well to continue financing its growth projects and dividend.

Duke Energy has been paying dividends for more than 90 years, and its payment should remain safe for many years to come.

Dividend Growth Analysis
Duke Energy’s Dividend Growth Score is 39, which indicates close to average dividend growth potential.

While regulations generally protect a utility company’s earnings and market share, they also limit growth opportunities. As a result, most utility businesses have below-average dividend growth rates, and Duke Energy has been no exception.

Duke Energy has made regular quarterly dividend payments since the 1920s and raised its dividend by 3.6% in 2016. The company’s dividend has grown by about 2% per year for most of the last decade. However, management expects to double the dividend’s growth rate to 4% per year to better reflect an improvement in Duke’s lower risk business mix and core earnings growth rate of 4-6% per year.

Stock #2: Verizon Communications (VZ)
Dividend Yield: 5.1% Forward P/E Ratio: 11.8 (as of 7/3/2017)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 12 Years

Verizon is one of Warren Buffett’s high-yield dividend stocks and a favorite source of income for many retired investors. The company has paid dividends for more than 30 years and has raised its payout for over 10 consecutive years – the sign of a durable company.

Verizon is the largest wireless service provider in the United States, and the company’s 4G LTE network is available to over 98% of the country’s population. Wireless operations account for close to 75% of Verizon’s total revenue but generate over 85% of its operating income.

Wireline operations, such as traditional voice services and broadband video and data, account for the remainder of Verizon’s business.

Overall, Verizon maintains more than 114 million wireless retail connections, 7 million Fios internet subscribers, and 5.8 million Fios video subscribers.

Business Analysis
Maintaining a quality wireless network across the country costs a lot of money. Verizon invested more than $17 billion in capital and spectrum licenses during 2016 to increase the future capacity of its wireless network and enhance its fiber network.

Thanks to its investments, the company has remained at the top of Root Metrics’ rankings of wireless reliability, speed, and network performance for each of the last five years. With its 4G LTE network covering over 98% of the U.S. population (roughly 314 million people), Verizon’s reputation for quality and valuable brand help it maintain a large share of the market.

The company began conducting trials of 5G wireless technology during 2016 and will continue working hard to maintain its edge over competitors when it comes to moving to the next generation network architecture. As long as Verizon continues to invest in leading network coverage and architecture, the company should continue enjoying a huge base of customers.

New entrants will have an extremely hard time challenging Verizon or any of the other major telecom players because they lack the capital, spectrum, subscriber base, and brand recognition needed to effectively compete.

In addition to the industry’s high barriers to entry, the wireless communications market is appealing because its services are non-discretionary in nature. For example, Verizon’s churn rate (i.e. the percentage of customers who leave) in its wireless business was about 1% in 2016. The majority of the company’s revenue is also recurring because consumers and businesses have a continuous need to communicate and use data.

Key Risks
The biggest uncertainty facing Verizon is future growth in wireless. Subscriber growth has largely plateaued as smartphone penetration has already tripled since 2010.

Sprint and T-Mobile have also improved the coverage and quality of their networks while becoming more aggressive with their pricing plans, narrowing the network quality advantages enjoyed by Verizon.

It’s hard to say what will drive the next wave of wireless growth. Internet of Things, video, and virtual reality are all candidates, but it’s difficult to forecast when they could start moving the needle.

If growth in the wireless market remains sluggish or deteriorates, the battle between incumbents for existing subscribers could intensify and pressure the industry’s margins.

Verizon has been on the hunt for new areas of growth, investing in content and mobile advertising platforms. While Verizon is certainly not betting the house on these markets, they still present some strategic and financial risk given the company’s lack of expertise in these areas. There’s also risk that management pursues a large acquisition that ultimately backfires.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Verizon’s Dividend Safety Score is 84, which indicates that the company’s dividend payment appears to be very safe.

Verizon’s dividend is first supported by its healthy payout ratio. Based on Verizon’s consensus earnings per share forecast for 2017, its payout ratio for the year will be close to 60% (i.e. for every dollar of earnings that Verizon earns, it will be paying out 60 cents as a dividend).

This is a reasonable payout ratio for a steady firm such as Verizon. The company’s sales barely dipped during the financial crisis, and Verizon’s free cash flow per share actually grew each year. Businesses and consumers need Verizon’s wireless services regardless of how the economy is doing.

Another important factor to monitor when assessing dividend safety is a company’s balance sheet. Verizon took on substantial debt when it acquired Vodafone’s interest in Verizon Wireless in 2014. However, the firm has an objective of reducing its debt to return to its pre-Vodafone transaction credit rating profile over the coming years.

Each of the major credit agencies has issued a “stable” outlook for the company, and I am not overly concerned about Verizon’s financial leverage given the predictable cash flow it generates.

Overall, Verizon’s dividend looks safe. The company maintains healthy payout ratios, consistently generates free cash flow, provides non-discretionary services, and has demonstrated a commitment to paying and growing its dividend over the years. The main risk is if management decides to pursue a large acquisition for growth and needs to restore the balance sheet as a result.

Dividend Growth Analysis
Verizon’s Dividend Growth Score is 6, which indicates relatively slow future dividend growth potential.

Including Verizon’s history trading as Bell Atlantic prior to 2000, the company has paid uninterrupted dividends since 1984 and increased its dividend all but seven years since then.

While Verizon’s dividend has been consistent, growth has been slow. Verizon’s last dividend increase was a 2.2% raise in 2016, and the company’s dividend has compounded by 4.5% per year over the last decade.

Looking ahead, Verizon’s dividend growth will likely remain between 2% and 3% per year, tracking the company’s underlying earnings growth.

Stock #3: Realty Income (O)
Dividend Yield: 4.5% Forward P/E Ratio: 18.3 (as of 7/3/2017)
Sector: Real Estate Industry: Retail REIT
Dividend Growth Streak: 24 Years

Realty Income is known as “The Monthly Dividend Company” and is one of the best monthly dividend stocks in the market. The business has paid monthly dividends for more than 45 consecutive years and increased its dividend over 85 times since 1994.

Realty Income was founded in 1969 and is a real estate investment trust (REIT) with more than 4,900 properties located across 49 states. Almost all of the company’s properties are single-tenant and are leased to more than 240 different commercial tenants doing business in over 50 different industries.

Business Analysis
Few companies have maintained as strong of a dividend growth track record as Realty Income. The company’s success is driven by its diversified portfolio, disciplined capital allocation, focused business strategy, and strong financial health. These factors have combined to create an extremely resilient business.

The company leverages its relationships with tenants, property developers, brokers, investment banks, and other parties to source acquisition opportunities with strong initial cap rates and built-in rent growth. Realty Income will only purchase freestanding, single-tenant properties located in big markets and/or key locations that it can lease to tenants with superior credit ratings and cash flows.

The retail business is very much driven by location, and Realty Income’s portfolio clearly plays to this critical success factor. As a result of the company’s efforts and discipline, its occupancy rate has never dipped below 96.6% going all the way back to 1992. Sustained high occupancy rates signal the high quality locations of Realty Income’s properties and the financial strength of its tenants.

Overall, it’s hard not to like Realty Income’s business. The company owns thousands of extremely valuable retail locations; is diversified by tenant, industry, and geography; maintains a conservative capital structure; has plenty of opportunities for future growth; and has a long track record of creating value for shareholders.

Key Risks
It’s challenging to identify many risks that could impair the long-term earnings potential of Realty Income. The company’s diversification, financial conservatism, and focus on quality tenants and recession-resistant industries eliminate many fundamental risks faced by other REITs.

Realty Income is significantly exposed to the consumer retail sector (80% of total rent), which is constantly evolving due to changing consumer preferences and the continued rise of e-commerce. However, Realty Income is not overly exposed to any single industry and derives the majority of its retail rent from tenants with business models that are less susceptible to online spending (e.g. dollar stores, services).

Aside from analyzing the health of a REIT’s tenants, it’s worth mentioning that REITs face higher capital market risk than most other types of business models. REITs are required to pay out at least 90% of their taxable income as dividends, which means they have less capital at their disposal to grow their businesses. As a result, they need to issue shares and raise debt to finance property acquisitions and grow cash flow. If capital markets freeze up and/or business fundamentals deteriorate, dividend cuts can become a real risk depending on the REIT.

Realty Income is conservatively financed and focuses on high quality tenants with less economy-sensitive businesses, helping mitigate this risk (Realty Income’s revenue declined by just 1% in fiscal year 2009, and the company recorded a 96% occupancy rate). Overall, Realty Income seems to have low fundamental risk.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Realty Income’s Dividend Safety Score is 84, which indicates that the company’s dividend payment is very safe.

Realty Income’s solid Dividend Safety Score is driven by the company’s reasonable payout ratio, stable long-term business results, conservative capital structure, and diversified mix of rent revenue.

Unlike corporations, REITs report a supplement measure known as “adjusted funds from operation” (AFFO) in place of net income to get a better sense of their true dividend payout ratios. AFFO can be thought of like free cash flow for a REIT.

Based on 2017 consensus AFFO estimates, Realty Income’s projected AFFO payout ratio is close to 80%. I generally prefer companies with lower payout ratios to provide a greater margin of safety, but I will make exceptions for companies with extremely dependable earnings.

Realty Income seems to fit the bill. The company’s long-term leases, consistently strong occupancy rates, quality real estate locations, business diversification, and financially healthy tenants alleviate most of the concerns associated with a high payout ratio, which is standard for every REIT because of their unique tax structure.

Another positive supporting Realty Income’s high Dividend Safety Score is its balance sheet. The company maintains an investment-grade credit rating from Standard & Poor’s and should have no difficulty continuing to access capital markets.

When combined with management’s clear commitment to the dividend, Realty Income seems very likely to remain “The Monthly Dividend Company” for many months and years to come.

Dividend Growth Analysis
Realty Income’s Dividend Growth Score is 25, which indicates low-single digit future dividend growth potential.

Despite management’s solid track record of paying and increasing dividends over the years, Realty Income’s dividend has grown by 5.3% annually over the last 20 years and by 3.3% per year over the last three years.

Going forward, I expect Realty Income’s dividend growth to average 3-5% per year – roughly in line with earnings growth. REITs pay out almost all of their income as a dividend and are generally mature, capital-intensive businesses, so dividend growth is often relatively low but reliable.

Investors can learn more about investing in monthly dividend stocks here (most should be avoided).

Stock #4: Philip Morris International (PM)
Dividend Yield: 3.6% Forward P/E Ratio: 24.0 (as of 7/3/2017)
Sector: Consumer Staples Industry: Tobacco
Dividend Growth Streak: 9 Years

Since spinning off from Altria (MO) in 2008, Philip Morris International has increased its dividend every year, delivering over 10% annualized dividend growth and solidifying itself as a top blue chip dividend stock.

Philip Morris International is the world’s largest tobacco seller, with its 80,000 employees operating 48 production facilities across more than 20 markets. The company markets numerous cigarette brands to over 150 million customers in over 180 countries and has a 27.9% global market share (excluding China and the U.S.).

Philip Morris’ sales are pretty evenly diversified with the vast majority of revenue coming from Europe and Asia. However, the European Union remains the company’s most profitable region by far, generating over 35% of the company’s total operating income in 2016.

Philip Morris owns the international rights to all of Altria’s most famous brands, including Marlboro, Merit, Parliament, Virginia Slims., L&M, Philip Morris, Bond Street, Chesterfield, Lark, Muratti, Next, and Red & White.

Business Analysis
Philip Morris International is an absolute giant in the global tobacco world. The company is the market leader in seven of the 10 largest OECD countries by industry volume and is the second largest player in another two. Outside of OECD countries, Philip Morris holds onto the number one market share spot in three of the 10 biggest countries by industry volume and is the number two player in another four.

The company’s dominance is driven by the strength of its brand portfolio. Philip Morris has six of the world’s top 15 cigarette brands, including the world’s number one brand – Marlboro. As a result, the company enjoys excellent pricing power. Since 2008, Philip Morris’ annual average pricing gain has been 6%, excluding excise taxes.

Cigarette consumption trends are declining around the world, but management is working hard to insulate itself away from the worst of the long-term decline in global smoking habits with its strong push into reduced-risk products, or RRPs. Specifically, the company has invested $3 billion since 2008 into developing its IQOS heat stick (which doesn’t burn tobacco) and its MESH vaporizer technology (which creates a nicotine rich vapor with none of the carcinogenic chemicals found in tobacco).

While the actual percentage of sales from RRPs is still very low (4.9% of fourth quarter 2016 net revenues excluding excise taxes), the company has seen strong growth in IQOS, first in Japan (where it was initially tested and 20% of its customers have already switched) and also in other nations that it has recently launched the product.

Only time will tell whether or not Philip Morris’s customers will decide that “heat-not-burn” alternatives to traditional cigarettes are truly a fulfilling substitute, and more importantly whether they wish to continue using them or just use them as a tobacco cessation method. However, the early traction is encouraging as Philip Morris looks to gradually shift its business from being a manufacturer of combustible tobacco products to an RRP-focused company.

Key Risks
There are several important risks to consider before investing in any tobacco stock, but Philip Morris in particular. First, understand that the company has no exposure to the world’s largest smoking population, China (where 30% of global smokers reside). While other developing economies like India are potential growth markets, the risk of governments becoming increasingly anti-tobacco due to rising global health costs is ever present.

From bans on marketing to gruesome warning labels on packaging and steadily rising taxes that threaten to price many consumers out of the market, governments around the world have applied greater regulatory pressure in recent years.

Finally, while RRPs like IQOS represent a necessary adaptation to the future realities of declining smoking rates worldwide, keep in mind that regulators around the globe have remained largely hostile to these smoking alternatives. In other words, while reduced-risk products may help to slow the decline in product volume, they probably won’t be able to halt it entirely.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Philip Morris International has a Dividend Safety Score of 78, indicating that its dividend is very safe and dependable.

The company’s Dividend Safety Score is so strong in part because the tobacco industry is generally seen as non-discretionary (i.e. “recession proof”) by its consumers, due to the addictive nature of the product.

As a result, Philip Morris International managed to grow its dividend even during the worst financial disaster since the great depression. The company’s sales fell by just 2% in 2009, and its free cash flow per share managed to grow.

The consistency of Philip Morris has allowed management to safely operate with a higher payout ratio. If currency fluctuations are excluded, the company’s earnings payout ratio in 2016 was 83% –high, but not as alarming for a stable business such as Philip Morris.

Philip Morris’s dividend safety is further enhanced by the company’s “A” credit rating from S&P. In a worst case scenario, in which earnings were to decline and its dividend payout ratio rose above 100%, the company could very likely still afford to borrow for a year or two to keep the dividend alive and well.

Dividend Growth Analysis
Philip Morris International has a Dividend Growth Score of 18, indicating that investors can expect rather weak payout growth in the next few years.

The company’s dividend growth has decelerated from 7.9% per year over the last five years to just a 2% raise in 2016. That’s not surprising given the rising U.S. dollar and slowing sales growth, which have taken a toll on the company’s payout ratios and income growth.

Philip Morris will need to slow the pace of future dividend growth in order to increase its payout security. Considering the company’s high payout ratio and some of the growth headwinds potentially facing the business, Philip Morris investors probably shouldn’t expect dividend growth of more than 3% annually or so over the next decade.

Stock #5: TELUS Corporation (TU)
Dividend Yield: 4.2% Forward P/E Ratio: 17.4 (as of 7/3/17)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 13 Years

TELUS was founded in 1993 and is one of Canada’s largest telecom provides with about one-third of the national wireless market and over 40% of the internet market. Both of these business lines are quite stable, making Telus a reliable investment for investors living off dividends in retirement.

The company’s wireless segment accounted for about 68% of segment-level EBITDA last year with wireline operations generating the remaining 32%. Telus’s internet and cable TV businesses are growing the fastest, while its legacy phone business is in secular decline.

Business Analysis
Telus became Canada’s top wireless company all the way back in 2000 when it acquired Clearnet Communications for $6.6 billion. The deal broadened the company’s range of bundled services while transforming it from a regional phone company to a blossoming national wireless business. Telus later embarked on a long-term restructuring plan, shifting away from its legacy phone business and towards faster-growing and more profitable wireless, internet, and pay TV businesses.

The company’s investments into its wireless network in particular have allowed it to consistently win market share and generate dependable subscriber growth over the years. The high quality of its network also results in pricing power to steadily increase its average revenue per user with the best customer retention of any Canadian telecom.

Key Risks
The U.S. telecom market has faced a bout of volatility over the past year as competition intensified. There have been concerns in the past that Canada’s favorable telecom industry could face similar disruption.

In fact, the Canadian Radio-Television and Telecommunications Commission has expressed concern that the three dominant telecoms controlling over 90% of the wireless market were threatening competition. As a result, the commission has been cracking down on what it considers oligopolistic practices.

Besides regulatory challenges, a new competitor could enter the marketplace altogether. Cable operator Shaw Communications (SJR) actually acquired spectrum-rich Wind Mobile for $1.6 billion in March 2016, marking its entry into the wireless market in an effort to better compete with Telus’ bundled services (Shaw can now offer television, wireless, and internet in major urban areas such as Ontario, Alberta, and British Columbia).

However, I would be surprised if the industry’s dynamics are hurt anytime soon. Wind Mobile is far behind Telus and the other major players with its network quality and coverage, for example. Telus is also enjoying nice growth from its internet and cable TV operations.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Telus has a Dividend Safety Score of 85, indicating that its dividend appears to be safe and dependable today.

The strong Dividend Safety Score should come as no surprise given that Telus was able to grow its payout even during the financial crisis, courtesy of its very stable revenue and earnings (most consumers and businesses need telecom services even when economic times are tough).

The predictability of Telus’ business has allowed the company to safely maintain an EPS payout ratio between 55% and 75% every year since the financial crisis as well.

While Telus appears to have a lot of debt at first glance, its balance sheet actually supports the dividend’s safety, too. Management expects to decrease the company’s leverage in the coming years as its long-term investments pay off and increase profitability.

Telus still maintains an investment-grade credit rating today, and its growing base of largely recurring cash flows mean it should have no problem easily servicing its existing debt while continuing to pay dividends.

Dividend Growth Analysis
Telus has a Dividend Growth Score of 52, indicating that investors can likely expect at least average payout growth over the next few years.

CaptureTelus has increased its dividend consecutively every year since 2004, growing its dividend by 11.9% annually over the past 10 years to make it a Dividend Achiever (learn about the Dividend Achievers here). Annual dividend growth has averaged more than 10% over the last five years as well.

The company has a target to increase dividends by 7% to 10% annually from 2017 to 2019 while maintaining a payout ratio between 65% and 75%, so solid dividend growth is expected to continue for shareholders.

Investors should note that, as a Canadian company, Telus’s stock has a 15% withholding tax on the dividend. Tax treaties between the U.S. and Canada allow you to potentially recoup this withholding, but it can be a complicated and lengthy amount of paperwork at tax time.

Additionally, Telus pays all its dividend in Canadian dollars, which means that the amount of money that will actually appear in your bank account can be far more volatile than the company’s steadily-growing dividend would indicate depending on what the USD-CAD currency exchange rate is at the time.

Stock #6: AT&T (T)
Dividend Yield: 5.1% Forward P/E Ratio: 12.9 (as of 7/3/17)
Sector: Telecom Industry: Diversified Communications Services
Dividend Growth Streak: 33 Years

Following its 2015 acquisition of DirecTV and planned takeover of Time Warner (TWX), AT&T is a leading provider of communications and digital entertainment services around the world. The company primarily provides wireless voice and data services (147 million subscribers), pay-TV services (46 million subscribers), and broadband internet services (16 million subscribers) to people and businesses across North America. No other telecom business has ever had as many subscribers across each service line as AT&T does now.

AT&T is a particularly popular stock for retirement because it is a member of the S&P Dividend Aristocrats Index, S&P 500 companies that have raised their dividends for at least 25 consecutive years. Investors can view data and analysis on all of the dividend aristocrats here.

Business Analysis
Most of AT&T’s markets are characterized by very high barriers to entry and are dominated by just a handful of companies selling nondiscretionary services, resulting in fairly predictable earnings. Imagine trying to launch a competing wireless network, for example. Not a single rational consumer would sign up for your wireless voice and data service if you couldn’t offer them nationwide coverage, which requires billions of dollars to be invested in spectrum and network infrastructure alone.

Prior to acquiring DirecTV, roughly 75% of AT&T’s earnings were generated from its wireless operations. Purchasing DirecTV made AT&T the largest pay-TV provider in the world and launched the company down a path focused on cost synergies and bundling services to drive earnings higher. In a mature market such as pay-TV, it can make sense to acquire more subscribers and cut out costs.

As the largest integrated communications company in the world, AT&T sees a number of opportunities to bundle its phone, TV, and broadband services. Bundles can be more price-effective for consumers while also raising switching costs. AT&T has noted that approximately 15 million DirecTV customers currently do not use its wireless products, and more than 20 million of its wireless customers do not have DirecTV.

With a world-class distribution system in place, AT&T’s next chess move was to acquire Time Warner. This deal would give the company leading content it can run through its distribution, saving costs and providing more value for consumers. Over 100 million customers subscribe to AT&T’s TV, mobile, and broadband services, which allows the company to offer bundled subscription packages that can hopefully be even further differentiated with the increased content flexibility provided by Time Warner.

While some of AT&T’s largest businesses are struggling to achieve meaningful new subscriber growth, the company’s sheer size and economies of scale make it a force to be reckoned with. AT&T’s acquisitions also provide a number of cost synergy opportunities to help it grow earnings even if revenue growth remains sluggish.

Key Risks
Major acquisitions come with great risk. AT&T has taken two large bites recently with its DirecTV and Time Warner acquisitions, and the success of these deals is incredibly important to AT&T’s future. DirecTV and Time Warner are both facing their own unique sets of disruptive challenges, too.

If industry conditions take an unexpected turn away from the direction AT&T has bet on in a big way or management becomes distracted (two very different cultures and businesses are combining), the company’s debt burden and refinancing risk could become a big deal within the next 5-10 years.

Delivering on its expected revenue and cost synergies from these acquisitions poses the greatest risk and opportunity for AT&T, which is doing all it can to squeeze profit growth out of its mature markets.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

AT&T has a Dividend Safety Score of 85, indicating that its dividend is one of the safest in the market.

AT&T’s nice dividend security begins with its payout ratio. The company’s dividend has consumed approximately 65% of free cash flow over the last year, which is consistent with AT&T’s payout ratio over most of the last decade. While a payout ratio near 70% is getting to be on the high side of what I prefer to see, it is more acceptable for companies with very predictable earnings such as AT&T.

Speaking of business stability, AT&T performed well during the last recession. We can see that the company’s sales edged down just 1% in fiscal year 2009, and AT&T’s free cash flow per share actually grew from $2.35 in 2008 to $3.01 in 2009. Consumers and businesses continued to rely on AT&T’s internet, voice, video, and data services during the economic downturn. The rise of smartphones didn’t hurt either.

Another factor supporting AT&T’s dividend is the company’s excellent free cash flow generation. Without free cash flow, companies cannot sustainably pay dividends unless they issue debt or equity. AT&T has generated positive free cash flow for more than a decade. Maintaining communications networks is extremely capital intensive, but AT&T’s subscriber base is so large and sticky that it more than covers the company’s capital spending requirements each year.

The main knock against AT&T’s dividend is the company’s high financial leverage, which is a result of AT&T’s capital-intensive business model. The company maintains a “BBB+” credit rating with S&P but is on watch for a downgrade following news of its $85 billion Time Warner acquisition, which will further strain the balance sheet.

For now, AT&T’s non-discretionary services, excellent free cash flow generation, and healthy free cash flow payout ratio all supported the company’s ability to continue paying down its high debt load while continuing to make dividend payments over the coming years.

Dividend Growth Analysis
AT&T has a Dividend Growth Score of 23, which indicates that the company’s dividend growth potential is below average.

AT&T has increased its quarterly dividend for 33 consecutive years. However, annual dividend growth has remained between 2% and 3% for most of the past decade.

Looking ahead, I expect dividend growth to remain between 1% and 3% per year. AT&T expects its dividend payout ratio to remain in the 70s as a percentage of free cash flow going forward. In other words, there is little room for the dividend to grow faster than the company’s growth in underlying free cash flow.

With a number of technological changes gradually impacting a number of AT&T’s markets (e.g. pay-TV and wireless), it’s hard to imagine a company of this size growing much faster than a couple of percentage points per year. Dividend growth will follow a similar path.

Stock #7: Welltower (HCN)
Dividend Yield: 4.6% Forward P/E Ratio: 14.1 (as of 7/3/17)
Sector: Real Estate Industry: Healthcare REIT
Dividend Growth Streak: 14 Years

Founded in 1970, Welltower is America’s largest medical real estate investment trust (learn how to invest in REITs here). The company owns approximately 1,300 properties located primarily in major cities across the U.S., Canada, and the U.K. Welltower is involved in every aspect of patient care, from hospitals and long-term skilled nursing facilities to senior assisted living communities and medical office buildings. Senior housing is its biggest driver, accounting for 64% of operating income.

The way Welltower makes money is by owning a high-quality portfolio of medical properties and renting them out, under long-term contracts, to a diverse group of partners, such as Brookdale Senior Living (BKD) and Genesis Healthcare (GEN), who are the ones actually caring for patients.

Business Analysis
As America’s largest medical REIT, you might expect Welltower’s growth to be rather slow. However, Welltower has been able to continue recording far better growth than its major rivals, such as fellow medical REIT titan Ventas (VTR).

Welltower has been able to earn higher profits from the same properties over time primarily because of the contracts management is able to strike with its partners. Not only are they usually very long in duration, but they also include annual rent escalators to offset inflation. Welltower has spent over 50 years consolidating the fast growing, but highly fragmented medical property market, and the future is bright.

With the U.S. health care real estate market being an estimated $1 trillion in size, Welltower’s market share is less than 3%. While the company has invested $28 billion since 2010 to nearly quintuple in size, there should be plenty of opportunities for continued growth, especially as America’s population continues aging (seniors housing accounts for 64% of Welltower’s net operating income).

Key Risks
One of the biggest risks facing Welltower is the relatively high concentration of net operating income it derives from its largest partners, such as Sunrise Senior Living (13%) and Genesis Healthcare (16%). The industries in which Welltower’s tenants operate are low margin, and this means that some companies can occasionally fall on hard times, making it harder to meet their rent obligations.

With government healthcare policies subject to change over the coming years, investors also need to watch the financial health of Welltower’s tenants. Most of the company’s cash flow base is derived from private payers, but roughly 11% of its cash flow is indirectly derived from government funding.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Welltower has a Dividend Safety Score of 84, indicating that its dividend is very safe and extremely unlikely to be cut.

Welltower has never cut its dividend since it began paying one in the early 1970s, and the dividend has been raised almost every calendar year. This is due to several positive factors.

First, the medical industry is generally insensitive to economic downturns, especially with the secular tailwinds of a fast aging population in the US, Canada, and England. As a result, Welltower’s revenue grew each year during the financial crisis.

Second, the long-term rental agreements that underpin Welltower’s business model make for extremely secure and predictable cash flow.

Next, management has shown a long-term dedication to consistent and moderate dividend growth, while maintaining a sustainable and secure payout ratio. The company’s cash flow payout ratio sits close to 85%, indicating that the current dividend is reasonably well covered.

While Welltower carries a lot of debt to run its business, the company enjoys investment grade ratings from all three credit rating agencies. Management has also been improving the company’s leverage ratios, underscoring the company’s conservative culture.

Overall, Welltower’s dividend is very safe because of the company’s reasonable payout ratios, recession-resistant business, conservative management style, and proven commitment to the dividend.

Dividend Growth Analysis
Welltower has a Dividend Growth Score of 33, which indicates that the company’s dividend growth potential is somewhat weaker than average.

Welltower’s dividend has compounded by just 2.5% per year over the last 20 years and by 3.9% annually over the last five years.

While Welltower’s rate of dividend growth isn’t eye-popping, the company has paid uninterrupted dividends since 1971 while increasing its dividend for more than 10 consecutive years.

Going forward, Welltower’s dividend is likely to grow at a low- to mid-single-digit annual pace, matching underlying growth in cash flow. Welltower’s dividend has been paid for more than 180 consecutive quarters, and income investors should continue to be rewarded by the company.

Stock #8: PPL Corporation (PPL)
Dividend Yield: 4.1% Forward P/E Ratio: 18.0 (as of 7/3/17)
Sector: Utilities Industry: Electric Power
Dividend Growth Streak: 16 Years

PPL is a pure-play regulated utility company involved in the electricity distribution business in Pennsylvania, Kentucky, and the United Kingdom (55% of earnings). It also has a relatively small natural gas transmission and power generation business in Kentucky. The business has over 100 years of experience and provides service to more than 10.5 million customers.

Utility companies are popular with income investors because of their reliability. In fact, they meet many of Warren Buffett’s top pieces of investment advice, and Berkshire Hathaway owns several utilities.

Business Analysis
As a pure-play regulated utility, PPL enjoys extremely predictable earnings. For example, in the U.K. where about half of the company’s profits are generated, PPL’s base revenues are already set through March 2023, providing great visibility and predictable, inflation-adjusted growth. The company has earned a healthy double-digit return on equity for most of the past decade, receiving a nice payback on its investments, and operates in regions with supportive regulatory environments.

[ad#Google Adsense 336×280-IA]While returns are predictable for regulated utilities and benefit from the nondiscretionary nature of power (PPL’s sales dipped just 5% during the financial crisis), growth is usually harder to come by.

Electricity consumption is stagnant to declining as energy becomes more efficient, and population growth is limited in most developed countries.

However, PPL’s rate base is set to grow around 5% annually between 2017 and 2020 as management executes on the company’s nearly $16 billion capital spending program.

With an investment-grade credit rating, PPL’s earnings growth shouldn’t pressure the company’s balance sheet either.

Assuming the regulatory environment remains unchanged, PPL should continue delivering predictable results for investors for many years to come.

Key Risks
Utility companies are capital-intensive businesses and rely heavily on debt and equity markets to fund their growth projects. In fact, PPL’s earnings growth projection over the next few years assumes the company is able to issue equity of $350 million annually. If PPL’s stock price gets hammered and debt financing becomes harder to access or too expensive as interest rates rise, the company’s future growth could be jeopardized.

PPL is also unique compared to most utilities because of its meaningful presence in the U.K. The downside risk to this exposure is the ongoing fallout related to Brexit. PPL has a number of currency hedges in place (over 90% hedged on average from 2017-2019), but it remains to be seen what the ultimate impact from Brexit will be on both currencies and economic growth. The upside to PPL’s U.K. exposure is that it could be a beneficiary of a potential “cash repatriation holiday” under President Trump.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

PPL has a Dividend Safety Score of 86, indicating that its dividend is very safe and extremely unlikely to be cut.

PPL’s earnings payout ratio is expected to sit close to 70% in 2017, which is relatively high compared to most other dividend-paying stocks. However, PPL’s predictable earnings alleviate any concerns because it’s very unlikely that earnings would unexpectedly dip. That’s especially true given the rate base growth management expects over the next few years.

As long as the regulatory environment remains stable and management continues to hedge PPL’s exposure to Brexit-related currency movements, PPL’s earnings should continue covering the dividend with ease.

While predictable returns and recession-resistant services are strengths that support PPL’s strong Dividend Safety Score, its balance sheet deserves some attention, too. After all, companies will always pay their debt obligations before paying dividends.

Utilities are capital-intensive businesses, and PPL has a large pile of debt. Fortunately, PPL enjoys strong investment-grade credit ratings, and over 80% of its long-term debt does not mature until after 2021. While rising interest rates will increase PPL’s cost of capital and make it more expensive for the company to refinance its debt, it seems unlikely that PPL would ever be shut out of credit markets and unable to fund its growth projects.

Overall, PPL’s stable earnings and time-tested operations support the safety of the dividend and make the company’s debt burden more manageable.

Dividend Growth Analysis
PPL has a Dividend Growth Score of 7, which indicates that the company’s future dividend growth is likely to remain slow.

PPL has rewarded shareholders with 16 consecutive years of dividend increases. However, the company’s dividend growth rate has steadily decelerated from 3.3% per year over the last decade to just 1.1% annually over the last three years.

Fortunately, better growth could be ahead. With the company’s rate base expected to grow 5% per year over the next few years, earnings growth will be on the rise. As a result, PPL’s management is targeting annual dividend growth of 4% through 2020. Once PPL’s earnings growth picks up, its Dividend Growth Score will also rise.

Stock #9: National Retail Properties (NNN)
Dividend Yield: 4.6% Forward P/E Ratio: 15.7 (as of 7/3/17)
Sector: Real Estate Industry: Retail REIT
Dividend Growth Streak: 27 Years

National Retail was formed in 1984 and is a real estate investment trust with more than 2,500 properties over 48 states. The company’s retail properties are leased to more than 400 tenants across nearly 40 industry classifications such as convenience stores and restaurants, providing nice diversification.

Furthermore, National Retail only originates single-tenant triple-net leases, which shift property operating expenses such as maintenance, taxes, and utilities to the tenant. In other words, the rental revenue received by National Retail has substantially fewer expenses and more stable net cash flow than other REITs with a smaller mix of triple-net leases.

Business Analysis
National Retail has a strong moat and plenty of opportunities for long-term profitable growth. The company’s strengths really begin with management’s focus on generating consistent annual funds from operations (FFO) per share growth, increasing the dividend annually, and assuming below average balance sheet and portfolio risk. These objectives have resulted in a conservatively managed, well-diversified business that is not susceptible to any single industry, customer, or geography, which results in very reliable results.

For example, since 2003, National Retail’s occupancy never fell below 96.4% while the REIT industry average never rose above 93.5%. These strong results are also driven by the company’s well-placed retail locations, which have helped National Retail not have to discount its leases or make substantial improvements to its properties to get tenants to stay.

National Retail’s property portfolio is further helped by its concentration with consumer-focused retailers, which face more switching costs than an office or industrial customer because they are more location-driven; they don’t want to risk disrupting their established customer base to save a bit on rent, resulting in stronger renewal rates. As a result, over 60% of the company’s leases are not up for renewal before 2025, and fewer than 10% of leases are due for renewal any single year until then. This protects National Retail from being forced to renew a substantial portion of its leases during a down market. The company’s average remaining lease term is also over 11 years, providing good cash flow visibility.

Key Risks
Management’s conservatism reduces most of the diversifiable risk the company faces. It seems unlikely to us that any one industry, customer, or geography could permanently impair the company’s long-term earnings potential. However, it’s worth noting that most of National Retail’s tenants are mostly non-investment grade businesses, which are ostensibly riskier that investment grade tenants in the event of a recession.

Management targets this group because it allows for better pricing and rent growth. The company also believes that tenant credit ratings can be a fleeting factor, and there is always room for tenant credit improvement. We aren’t overly concerned about this risk factor based on National Retail’s results during the last recession (87% of prior leases were renewed in 2009), consistently high occupancy rates, conservative balance sheet, and overall mix of tenants – roughly two-thirds of National Retail’s rent is from public companies of those with rated debt.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

National Retail has a Dividend Safety Score of 79, which suggests that its current dividend payment is very safe.

The company’s adjusted funds from operations (AFFO – the equivalent of free cash flow for REITs) payout ratio was 74% in 2016. While we generally prefer a lower payout ratio for most types of businesses, National Retail’s long-term leases, high occupancy rates, and quality real estate locations alleviate some of our grievances.

Dividend safety is also boosted by the company’s strong occupancy rates, which even held up during the last recession. At the end of 2009, National Retail’s occupancy rate was 96.4%. The company was also less diversified than it is today with tenants in 13 different industries in 2009 compared to about 40 in 2016.

National Retail generated $1.70 AFFO per share in 2009, which solidly covered its $1.50 per share dividend. It’s also worth mentioning that the company has successfully made acquisitions most years to continue growing the business in many environments (sales increased throughout the recession thanks to acquisitions).

Finally, National Retail’s dividend is supported by its conservative balance sheet. S&P gives the company a BBB+ credit rating, and National Retail is well capitalized enough to never need to access capital markets to support its business and dividend (few REITs can make that claim).

Dividend Growth Analysis
National Retail has a Dividend Growth Score of 15, which suggests the company’s dividend growth potential is rather slow.

Despite the company’s solid track record of raising its dividend for 27 consecutive years, National Retail’s dividend has increased by just 3% annually over the past decade. Only three other REITs have increased their dividends for as long as National Retail has.

Since REITs pay out most of their income as a dividend and are generally mature, capital-intensive businesses, dividend growth is often relatively low but reliable. We expect National Retail’s dividend growth to continue at a 2-4% annual pace over time, and investors should make sure they are aware of the tax consequences of investing in REITs.

Stock #10: Magellan Midstream Partners, LP (MMP)
Dividend Yield: 4.9% Forward P/E Ratio: 18.6 (as of 7/3/17)
Sector: Energy Industry: Oil & Gas Production MLP
Dividend Growth Streak: 17 Years

Magellan Midstream Partners is a master limited partnership (MLP) engaged in the transportation, storage, and distribution of refined petroleum products (58% of operating profits) and crude oil (32%). It also has a marine storage business (10%). Unlike most MLPs, Magellan Midstream Partners has a simple organizational structure with no incentive distribution rights.

The company owns over 13,000 miles of refined products, crude oil, and ammonia pipelines, as well as more than 50 terminals. Magellan Midstream Partners is a critical player in the energy industry, linking sources of crude oil supply with refineries and ultimately with end users of petroleum products.

Business Analysis
When it comes to transporting petroleum products between different markets, pipelines are usually the most reliable, lowest cost, and safest option. Magellan Midstream Partners boasts the longest refined products pipeline system, giving it unique access to a large number of refiners. The company also enjoys profits that are driven by throughput volume and tariffs rather than commodity prices.

In fact, management expects future fee-based, low risk activities to comprise at least 85% of the company’s total operating profit. Magellan Midstream Partners enjoys long-term contracts with fixed rates that guarantee the company a minimum level of volume and predictable cash flows. As long as the company’s customers can continue making payments and honor their long-term agreements, few business models are more stable than Magellan Midstream Partners’.

As low-cost U.S. shale oil production continues to grow over the coming years, the need for transportation and storage services will also rise. This should benefit the incumbents because they already have access to key shipping and refining hubs, as well as relationships with major players in the value chain. Furthermore, few companies can afford the massive cost required to construct pipelines, resulting in a fairly consolidated market.

Finally, it’s worth repeating that Magellan Midstream Partners has no incentive distribution rights, which means it does not have to give any of its distributable cash flow to a general partner. As a result, the company keeps more cash that it can reinvest and use for faster distribution growth. The lack of incentive distribution rights, combined with a BBB+ credit rating from S&P, also provides Magellan Midstream Partners with one of the lowest costs of capital in the sector, reducing financing risk and making growth projects all the more attractive.

Key Risks
While Magellan Midstream Partners may represent one of the seemingly lower risk midstream MLPs, there are still two main risks that investors need to be aware of. First, the long-term growth story for Magellan Midstream Partners is tied to that of the U.S. shale industry. This means that, although the short-term price of Magellan Midstream Partners’ units, which generally trade along with oil prices, doesn’t affect its cash flow, the MLP’s ability to continue finding profitable projects to invest in and thus grow its DCF does require an eventual recovery in oil & gas prices.

Since pipelines have high fixed costs, their profitability is sensitive to the amount of fees they charge and how much product volume they are able to move. If energy production were to fall, the need for pipelines could theoretically decline and E&P customers might not be able to pay the fees outlined in their contracts with Magellan Midstream Partners and other midstream MLPs. The long-term growth rate of MLPs has come into question for some of these reasons, resulting in the sharp sell-off that has taken place since late 2014.

Rising interest rates are another risk factor to consider. Fortunately Magellan Midstream Partners’ large scale and investment-grade BBB+ credit rating means that it isn’t likely to be priced out of the debt markets in the coming years. However, we have to remember that as an MLP, Magellan Midstream Partners pays out the vast majority of its cash flow as distributions and thus must periodically turn to debt and equity markets to raise growth capital. Rising interest rates could result in higher costs of capital going forward, which makes future payout growth harder to achieve. Learn about other key risks faced by MLPs here.

Dividend Safety Analysis
Simply Safe Dividends rates a company’s dividend safety and growth potential by reviewing its key financial statements and ratios. Dividend scores range from 0 to 100, with scores below 20 considered weak, 50 considered average, and 80 or higher considered excellent.

Magellan Midstream Partners has a Dividend Safety Score of 76, which indicates that the partnership’s distribution is safe.

Magellan Midstream Partners pays one of the safest dividends in the entire MLP sector. The company targets a distribution coverage of at least 1.1 on a long-term basis, and management is very conservative with debt.

In fact, Magellan Midstream Partners has a long history of maintaining sector-leading credit metrics. With a relatively low level of debt and an investment-grade credit rating, the company does not depend on equity issuances, which can be quite expensive if investment sentiment sours, to fund its dividend or current growth projects. Magellan’s lack of incentive distribution rights also lowers its cost of capital since the company does not need to share its distributable cash flow.

Finally, it’s hard not to like the company’s tollbooth-like business model. While there is always risk that Magellan’s customers won’t be able to honor their contracts if oil and gas prices remain depressed, it’s comforting to know that the majority of the company’s operating profits are under long-term contracts. Magellan has the financial strength and business model to pay reliable distributions for many years to come.

Dividend Growth Analysis
Magellan Midstream Partners has a Dividend Growth Score of 74, which suggests the company’s distribution growth potential is above average (the S&P 500 has achieved long-term dividend growth of about 6% per year).

Magellan Midstream Partners has rewarded investors with 12% annual distribution growth since the company’s initial public offering in 2001, raising its payout each year. Management targets 8% dividend growth each of the next two years, which is expected to keep the partnership’s distribution coverage ratio between 1.1 and 1.2.

Brian Bollinger
Simply Safe Dividends

Simply Safe Dividends provides a monthly newsletter and a comprehensive, easy-to-use suite of online research tools to help dividend investors increase current income, make better investment decisions, and avoid risk. Whether you are looking to find safe dividend stocks for retirement, track your dividend portfolio’s income, or receive guidance on potential stocks to buy, Simply Safe Dividends has you covered. Our service is rooted in integrity and filled with objective analysis. We are your one-stop shop for safe dividend investing. Brian Bollinger, CPA, runs Simply Safe Dividends and previously worked as an equity research analyst at a multibillion-dollar investment firm. Check us out today, with your free 10-day trial (no credit card required).

Disclosure: Brian Bollinger is long VZ, PM, PPL, and NNN