Retirement Strategy: 3 Dividend-Paying Stocks For Mom

Apr. 12, 2021 7:00 AM ETED, HR, PRU71 Comments

Summary

Anyone who has read Regarded Solutions articles knows that there are so many nuggets buried in each and every sentence.
Over the weekend, I spoke with my mother, who is ready to put some dry powder to work.
She asked me to put together a list of three dividend-paying stocks to buy right now.
So I did just that.
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Retirement plan with calculator pen and glasses — Photo by Piotrekswat/iStock via Getty Images

Last week, I wrote an article in remembrance of my good friend Alan Saltzman - known here as Regarded Solutions. As I pointed out in the article, writing the tribute was both inspiring and heartfelt.

I’m so glad that I decided to write it, because there were so many comments praising our friend and his vast accomplishments on Seeking Alpha and over his lifetime.

And to be honest, after 10 years of writing on Seeking Alpha, I was beginning to get somewhat burned out.

However, after reading all the comments from the tribute to Regarded Solutions, I have become super energized.

You see, with Alan’s passing, there is an obvious hole on Seeking Alpha, and while I know I could never (in my wildest dreams) fill his shoes, I feel as though I can continue to preserve his legacy by writing the Retirement Strategy series.

Anyone who has read Regarded Solutions articles knows that there are so many nuggets buried in each and every sentence and I know that Alan would be pleased for me to continue with the series.

As many of my readers know, my “wheelhouse” is in real estate, and specifically real estate investment trusts.

However, over the last year or two, I have been tapping into other dividend-paying categories like BDCs, MLPs, Utilities, and ordinary C-corps.

While I continue to make REITs my primary writing platform, I have been asked by many of my followers to provide other ideas in an effort to provide a more diversified menu of actionable ideas.

In fact, over the weekend I spoke with my mother, who is ready to put some “dry powder” to work. She is also a real estate investor (she has been a broker for decades) and she asked me to put together a list of three dividend-paying stocks to buy right now.

As an added advantage, I am also a co-founder of Dividend Kings (on Seeking Alpha Marketplace) so I can easily screen for the highest-quality blue-chips that are trading at the widest margin of safety. Back in 2015, Regarded Solutions wrote,

As a dividend growth investor, I will be looking for bargains in my dividend aristocrats. Paying less to add more shares, to produce more income, with the best dividend-paying stocks on Earth seems like a good idea to me.

Lessons To Live By

One of the reasons that I always enjoyed reading Regarded Solution’s articles is that he would always provide us with some “nuggets of wisdom”.

His commentary was usually very basic, because he was targeting the DIY (do-it-yourself) investor looking to achieve financial freedom. Here’s an example of some “suggestions to those just starting out” from August 2017:

While you might have enough time to recoup from a severe setback, I would take the following actions myself:

Reduce spending in basically every category.

Aggressively increase savings by as much as possible for as long as possible, as soon as possible.

Invest slowly and conservatively in the greatest companies on Earth with strong balance sheets and a history of success through good and bad times.

Do not chase yield. The higher the yield, the greater the risk. You have the time to ease into solid stocks and grow your income slowly, over time. Let compounding and dividend reinvestment do their job for your portfolio's total value and income growth.

Know your risk tolerance, and see if you can look at your portfolio as I have illustrated above. The daily fluctuations in share price are less important than a reliable stream of income.

Build your cash reserves so that when the worst-case scenario finally hits, you can be a buyer not a seller into the crush of declining prices.

3 Dividend-Paying Stocks for Mom

As I alluded to, our service provides a vast library of research tools, and to assist my mother with three high-quality stocks I decided to explore our “DK Research Terminal”. There you will find a master list of 492 individual stocks with an average dividend yield of 4.4%.

Source: Dividend Kings

One of the most important things that my mother is looking for is “quality”. As Regarded Solutions reminds us, “Know your risk tolerance”. One of the things that he insisted on was that the prospective stock be among the “greatest companies on Earth with strong balance sheets and a history of success through good and bad times.”

My mother is looking for income, too, but she has no interest in “chasing yield” because, as Regarded Solutions pointed out, “the higher the yield, the greater the risk.”

So the first pick in that so-called “sweet spot” is Consolidated Edison (ED), a utility stock that was founded in 1823 that provides energy services for over 10 million people. ED is the second-largest owner of solar electricity production in North America and the seventh-largest in the world.

ED is also the longest continuously listed company on the NYSE with an impressive record of paying and increasing dividends for 46 years in a row. This is the longest string of annual dividend increases of any utility in the S&P 500.

ED has a strong balance sheet and liquidity profile: 48% equity ratio and $3 billion revolving credit agreements (rated BBB+ / Baa2). Fueling the growth is an attractive infrastructure capex spend that includes $11 billion over the next three years. Recently Dividend Sensei, fellow Dividend Kings co-founder, explained,

ED is 16% undervalued, and management/analysts expect 3% to 4% CAGR long-term growth. ED has the consensus potential for 13% CAGR total returns over the next few years. ED is a 100% A+ exceptional investment idea for those comfortable with its risk profile and who own it as part of a diversified and prudently risk managed portfolio. 3X the market's yield, 3X the dividend income, and almost 2X the risk-adjusted 5-year expected returns from famously boring but very high-quality utility.

ED shares are now trading at $75.17 with a dividend yield of 4.1% with a P/E multiple of 17.9x (5-year average is 18.2x). I consider ED a reasonable Buy for my mom with the potential for low-double-digit returns over the next few years.

My next retirement pick is Prudential (PRU), and in a recent article I explained,

... after a 152% rally that has put even the tech-heavy Nasdaq to shame, Prudential is still potentially an anti-bubble high-yield blue chip” and is “still one of the highest quality and best Buffett-style "fat pitches" on Wall Street.

Today PRU's balance sheet is a fortress, as confirmed by no less than four rating agencies: S&P rating: A stable, Fitch: A stable, Moody's: A3 (A- equivalent) stable, and AM Best: a1 stable. PRU's 79% quality score means it's similar in quality to such 9/10 blue chips such as Apple (AAPL), Texas Instruments (TXN), and Verizon (VZ).

Also, since income is important for my mom, it’s good to know that PRU has raised its dividend for the 12th consecutive year. The company did cut in the Great Recession, but: “Twelve years is one of the statistically significant dividend streak cut-offs because relatively few companies with 12-year-plus streaks cut during the pandemic”.

PRU is now trading at approximately a 28% discount to the average historical fair value, creating very strong short-term upside potential: 2021 fair value range is $104 and $161. Shares are currently trading at $94.35 with a dividend yield of 4.9% and a P/E of 8.9x (five-year average is 9x).

If PRU grows as analysts expect through 2023, and returns to historical fair value, then analysts expect 47% total returns and 15.1% CAGR returns. Needless to say, I’m recommending for mom.

The final pick for mom is a REIT known as Healthcare Trust of America (HTA). We have been covering the pure play medical office building landlord since it was listed in 2012, and I have been impressed with the disciplined management team.

The company has increased its dividend in each of the last seven years (only peer that has done that) and has maintained a very strong balance sheet (rated BBB). I recently interviewed the CFO, Robert Milligan, and he told me,

Despite a little bit of a blip in early March and April, come May, most of our healthcare systems and our physician provider tenants have bounced back. They started seeing all their patients again. And now, they're seeing almost business as usual as we got into the third and fourth quarter of last year.

HTA entered 2021 with around $400 million of long-term capital it had raised (with a cost of capital in the mid 4s) and Robert told me that the company is going “to put it to work… and it's going to flow to the bottom line.” Analysts are expecting HTA to return to normal growth in the range of 4% to 5% over the next few years.

Shares are now trading at $27.91 with a dividend yield of 4.6% and a P/FFO of 16.2x (5-year average is 17.6x). We are maintaining a Buy with annual returns forecasted of around 15%.

Final Thoughts

In June 2020, Regarded Solutions said,

Many of you have expressed an interest in a portfolio for us older retired folks and I have given it a lot of thought. There IS a path for everyone, and rather than just suggesting an investment in AT&T (T) and a few Treasury Bonds, I felt I would lay out some simple plans for us "geezers" in various financial situations.

He added,

The truth is that none of us will live forever and having our priorities in order will make life easier as we age and/or face health issues.

Clearly, our friend was always candid, and his words were always inspiring, and there’s absolutely no better way to end this article than to quote Regarded Solutions once again,

I have been blessed with having all of you as my extended family, and your well wishes have been an enormous help to me personally! God bless you all.

I just looked out my window and I saw a rainbow in the sky, and it made me think of these words (quote from Regarded Solutions) that allow me to focus on my top priorities in life:

Photo Source

Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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Summary

Lessons To Live By

3 Dividend-Paying Stocks for Mom

Final Thoughts

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