For many people, retirement can be a period for pursuing new interests, taking long-desired vacations, and spending extra time with family. However, losing the security of steady, employment-generated income may lead to financial fears that can steal some of the luster from your golden years. Consequently, many investors turn to dividend stocks to provide a different type of income stream. But choosing the right ones can be daunting.
Through the power of compound growth, for example, monthly dividend-paying stocks which offer smaller but more frequent distributions may entice younger investors who have multidecade time horizons and are not in immediate need of the capital. Retirees, on the other hand, are in a different boat. They're more likely to be relying on those payouts to cover their immediate expenses and supplement their other sources of income, like Social Security checks and withdrawals from retirement accounts.
Given those specific needs, these three dividend stocks -- all hailing from the utilities sector -- may be good fits for retirees' portfolios: Consolidated Water (NASDAQ: CWCO), OGE Energy (NYSE: OGE), Pinnacle West Capital (NYSE: PNW).
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Come on in, the water's fine
You may not know Consolidated Water by name, but if you've visited the Caribbean, there's a good chance you've benefited from its services. In addition to operating seven plants that provide drinking water on Grand Cayman, it produces up to 12 million gallons of water daily for Nassau, the Bahamas, and provides water solutions in Belize and the British Virgin Islands. But the company isn't solely a Caribbean-focused business. For example, it also operates a seawater desalination plant in Bali, Indonesia, and is currently developing a seawater desalination project in Baja California, Mexico.
Consolidated Water's financial profile has many features that retirees -- who usually favor more conservative opportunities -- should find compelling. As of the end of the third quarter, it had zero debt on its balance sheet, and held $42 million in cash and cash equivalents. Additionally, the company represents a lower-risk option for investors since it often enters into long-term supply agreements, ensuring that it has clarity about its future finances.
The stock currently yields 2.1%, and the company has averaged a payout ratio of 74% over the past five years -- a figure that suggests the company is not jeopardizing its financial health to support its dividend.
This Oklahoma-based energy stock looks more than OK
While OGE Energy hasn't earned a place on the exclusive list of Dividend Aristocrats, the company's long commitment to rewarding shareholders is noteworthy. This energy delivery company proclaims on its website that it has never reduced its dividend since it hit the public markets in 1947. Looking only at more recent history, the company's dedication to rewarding shareholders is evidenced by the fact that it increased its dividend payment at a compound annual rate of 9.5% from 2012 through 2019.
Currently, OGE Energy's dividend yields 3.7% -- an attractive figure considering the Vanguard Utilities Index Fund ETF only yields 2.97%. That yield may cause some investors to worry that the company is being fiscally irresponsible and spending too much on its dividend, but in fact, the company's average payout ratio over the past five years is a conservative 59%. If that's not enough, perhaps the fact that Moody's, S&P's Global Ratings, and Fitch Ratings have all assigned investment-grade credit ratings to OGE Energy will ease the fears of risk-averse investors.
Finding value in the Grand Canyon state
With the help of its affiliates, Pinnacle West Capital has been providing energy and energy-related services to the people of Arizona for over 125 years. The company's principal subsidiary, Arizona Public Service (APS) is the state's largest and oldest electric company. Although the fact that APS relies on coal for about 23% of its annual energy generation may be concerning, the company intends to reduce its reliance on the fuel source, and expects to be completely coal-free within 20 years. Nuclear power and renewables accounted for about 31% and 8% of its electrical output, respectively, in 2018.
Pinnacle West's dividend currently yields 3.6% for investors. As with OGE Energy, a look at the company's payout ratio -- averaging 62% over the past five years -- should help to quash any concerns regarding the sustainability of that payout. Moreover (again like OGE Energy) Pinnacle West has investment-grade credit ratings from Moody's, S&P, and Fitch, suggesting its balance sheet is in good shape.
Image source: Pinnacle West.
While there's no guarantee that Pinnacle West will continue raising its dividend, its track record suggests that more payout increases are likely.
A final word on these dividend darlings
While Consolidated Water, OKE Energy, and Pinnacle West are all worthy of consideration for dividend-minded retirees, those looking for investments that carry the lowest level of risk may favor Consolidated Water and its zero-debt balance sheet. But with each of these companies, however, investors would be well-served to keep an eye on the payout ratio. If it creeps too high, that would be a sign that the company's dividend may be in jeopardy.
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