I’ve been dividend growth investing for more than 10 years now. What’s this strategy all about?
It’s all about investing in high-quality businesses that pay reliable, rising dividends to their shareholders. Reliable, rising dividends that are, of course, funded by reliable, rising profits.
I started investing in my 20s, invested heavily throughout my 30s, and am now coming up on 40 years old. And you know what? Investing needs can and often do change as you grow older.
When you’re young and have plenty of time for the compounding process to play out, you want growth. But when you’re older and you have less time and more bills, and you’re in retirement, it’s all about income right now.
That said, you want safe income. The last thing you want to do is chase yield and get burned by dividend cuts and cratering stock prices.
Because when you’re older, you have less time to make up for disasters like that. In addition, you still want some growth. Being retired doesn’t make you impervious to inflation. Costs are going to rise for the rest of your life.
So you want to make sure those big, fat dividends can help you keep up and protect your purchasing power.
Today, I want to tell you about three dividend growth stocks to consider buying if you’re in your 60s. Ready? Let’s dig in.
The first dividend growth stock I want to highlight today is Enbridge (ENB).
Enbridge is a multinational pipeline company.
This is the largest energy infrastructure company in North America. Enbridge operates the world’s longest and most complex crude oil and liquids transportation system. They use their massive pipeline system to transport crude oil and natural gas across North America. In fact, Enbridge transports 25% of the crude oil produced in North America, and they also transport 20% of all natural gas consumed in the US.
And what have we learned about energy and energy infrastructure recently?
It’s important. Like… we can’t live normal life without reliable access to energy… important. Every once in a while, society needs to be reminded of this. It’s easy to take some of this stuff that we use every day for granted. But with energy prices spiking worldwide and an energy crisis playing out in Europe, humanity is getting that reminder.
But Enbridge is not content to sit on its laurels.
Their energy infrastructure is critical. No doubt about it. But hydrocarbons are finite in supply. And society still has to prepare for that. Enbridge has to prepare for that. And that’s exactly what they’re doing. The company is aiming to have net zero emissions by 2050. Toward that end, Enbridge has committed almost $8 billion to renewable energy and power transmission projects that are currently in operation or under construction. They’re ensuring their future legacy.
And they’re also ensuring those big, growing dividends.
How big? Enbridge yields 6% right now. That’ll get some bills paid in retirement. But it’s not just an income story here. There’s also growth to be had. Indeed, Enbridge has increased its dividend for 26 consecutive years. You already know that bills are only going to go up over time.
Well, the dividends from Enbridge are also going up. Their 10-year dividend growth rate is 10.5%. That kind of dividend growth will certainly help you to keep up with inflation. And with a payout ratio of only 64.3%, based on midpoint guidance for this fiscal year’s DCF/share, this big dividend is healthy and easily covered.
This is a great stock for dividend growth investors in their 60s. And it’s one of my top five stocks for 2022.
I highlighted Enbridge’s special combination of yield and dividend growth when I picked it as one of my top five dividend growth stocks for 2022. It’s up 14% YTD in a tough market environment, so I guess a lot of investors have already gotten the memo. Still, even after a nice run, the stock doesn’t look richly valued.
A lot of its basic valuation metrics are close to their respective recent historical averages. For instance, that 6% yield is only 30 basis points lower than its own five-year average. If you’re in your 60s and looking to get the bills paid, 30 basis points of yield isn’t going to make or break your life. As long as Enbridge continues to pipeline energy, they should be able to continue pipelining those big dividends. Music to income-oriented dividend growth investors’ ears.
Next up, let’s talk about Main Street Capital (MAIN).
Main Street Capital is a business development company.
What does Main Street Capital do? Well, it provides debt and equity financing to smaller, private businesses by investing in them. And so, by extension, Main Street Capital shareholders are investing in these smaller, private businesses.
This company steps in when others won’t.
A lot of small businesses, especially those in distress, don’t have easy access to traditional financing options. They can’t just call up their private banker and get cash wired in. So some of these businesses turn to BDCs like Main Street Capital for their financing needs.
It’s a unique business that gives you exposure to many small businesses that you wouldn’t ordinarily have any exposure to via the US stock market – which is reserved for public companies that are often larger and more liquid. By the very nature of this business model, however, there’s a higher degree of risk involved. So you have to be aware of that. But risk and reward are linked at the hip. More risk. More potential reward.
And long-term shareholders have been rewarded.
This stock has compounded at an annual rate of 13.5% over the last decade. Double-digit annual returns are nothing to sneeze at. That’s great stuff. But I get it. You’re in your 60s. You want income. And you want it right now. Capital gain is great for twentysomething investors who can sit on that for decades. You need the cash flow. Well, I’ve got you covered.
This stock is a monster income producer.
The stock yields 6.2%. You don’t often see a yield that high in tandem with a fairly high degree of quality and reliability. And it gets better. The dividend is paid monthly. Pay monthly bills with monthly dividends. But wait. There’s more. The yield is actually higher than it appears. That’s because Main Street Capital routinely pays special dividends. And you also get growth here.
The company has increased its dividend for 12 consecutive years, with a 10-year dividend growth rate of 4.7%. Perhaps surprisingly, they never cut the dividend during the pandemic. That’s even while a lot of so-called safer business models did. I think that really speaks to Main Street Capital’s commitment to the dividend, as well as the reliability of it. With distributable net investment income covering the monthly dividend with room to spare, there should be a lot more to come.
This stock has held up well this year, but the valuation remains undemanding.
In the face of a correction in the S&P 500, and a full-on bear market in the Nasdaq, this stock is only down 5% on the year. And shareholders have been comforted by that big monthly dividend. So that’s not a bumpy ride at all. Still, there’s nothing outright expensive about the stock. Now, it can be difficult to value it based on traditional metrics. That’s because it’s a BDC.
But based on DNII/share, we’re looking at a multiple of 14.9. That’s somewhat analogous to a P/E ratio on a normal stock. Again, undemanding. And its current 6.2% yield is right in line with its own five-year average. If you’re a dividend growth investor in your 60s and looking for a big monthly dividend with solid growth and even special dividends on top of it, take a look at this name.
Last but not least, I want to highlight Altria Group (MO).
Altria Group is a cigarette and tobacco company.
Being in tobacco and cigarettes, this is what you might call a “sin stock”. It’s not for everyone. But if it is for you, you have a lot to look forward to. Because there’s a lot of money to be made in traditional tobacco products. And Altria is already preparing for a smoke-free future.
A smoke-free tobacco company?
Yep. Exactly. The major tobacco companies are aggressively investing in solutions that deliver nicotine in a less harmful way than cigarettes. And be it as a consumer or as an investor, I think that’s just what you want. After all, traditional smoking has been in secular decline for years.
So Altria has e-vapor and heated tobacco product offerings here. They also have exclusive rights to commercialize IQOS and three Marlboro HeatStick variants in the U.S. through their agreement with Philip Morris International. And this is in addition to regular smoke-free products like oral tobacco.
By the way, you can have secular decline and growing profits – simultaneously.
A lot of investors are under the mistaken belief that because cigarettes have been in secular decline that Altria must be in secular decline. Well, that’s actually not the case at all. Because of inelastic demand for these products, Altria has been able to raise prices in the face of a shrinking base.
And that has helped to bridge the gap between those products and the smoke-free future products. The company’s free cash flow today is more than twice as high as it was a decade ago. You know what else is higher?
The dividend.
Altria is a Dividend King. They have increased their dividend for 52 consecutive years. The 10-year dividend growth rate is 8.4%. If the business is in secular decline, someone forgot to tell Altria. But because of this concern about decline, as well as the fact that some investors just don’t want to invest in this industry, the stock has had lackluster demand for years.
And what has that done? Well, it’s helped to keep the price low and the yield high. The stock yields a mouth-watering 7% right now. Yes. 7% yield. And you’re pairing that with an 8%+ long-term dividend growth rate. It’s almost too good to be true. And based on midpoint guidance for this year’s adjusted EPS, the payout ratio is only 74.2%. The dividend is comfortably covered.
This is another stock that’s actually up on the year, but there could be a lot more where that came from.
While a lot of the bubbles out there are popping, dividend growth stocks are mostly cruising along this year. Altria is a great example – it’s up 8% YTD! Still, this is a stock that’s been perpetually cheap for as long as I’ve been investing. Based on that aforementioned guidance, the forward P/E ratio is only 10.7. That’s ludicrously low. Then there’s the P/CF ratio of 11.3.
Again, super low. And that compares very favorably to its own five-year average of 16.1. By the way, the 7% yield is also 60 basis points higher than its own five-year average. For sixtysomething dividend growth investors looking for healthy income right now, it’s hard to overlook Altria’s appeal. If you’re okay with the industry dynamics, strongly consider adding Altria to your portfolio.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
My #1 fund for a rock-steady 7% dividend in 2022... paid monthly! [sponsor]It's the brainchild of one of the smartest investment managers alive and it pays you every single month. Even better, this fund trades at a discount to NAV, so there's near-certain price gains ahead! All the details are waiting for you, along with 2 other incredible picks from my full "7% Monthly Payer Portfolio."