Entering into retirement doesn't mean the same thing it used to be. Considering that only 13% of employess have defined benefit plans with their employers, chances are you are one of the people that will need their 401(k) savings and other retirement investments to provide income. We're all living longer, and inflation will make that dollar today worth less a decade or two down the road.
A great way for retirees to get income today and worry less about inflation is to invest in dividend stocks that pay a decent sized yield and raises that payment on a regular basis. The more you can rely on dividends instead of drawing down your nest egg, the longer your retirement savings can last. Two stocks that fit the mold of high yield and growing payouts is oil and gas pipeline company Magellan Midstream Partners (NYSE: MMP) and telecom giant Verizon Communications (NYSE: VZ). Here's a look at why you might want to consider these two for your own retirement portfolio.
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A good income check today. A larger one tomorrow
It's a rare thing to find a high yield investment that can also grow its payout at a steady clip. Typically, you have to choose between a high-yielding stock with tepid growth or a lower yield with a faster rate of increases. With master limited partnership Magellan Midstream Partners, you get a stock that currently yields 4.9% and has a plan in place to grow that payout by at least 8% over the next couple of years.
There are a lot of things that make Magellan unique when compared to its pipeline and processing brethren, and many of those traits have been discussed frequently. So let's take a look at one less heralded advantage Magellan has over so many other master limited partnerships: Its ownership structure.
For the most part, companies that are master limited partnerships have two entities: a limited partner and a general partner. The limited partner owns the assets and buys completed projects from the general partner, while the general partner develops projects and then sells them to the limited partner in exchange for either cash or greater ownership in the business. This model is supposed to incent fast growth for the limited partner early on, but the fees general partners collect become onerous over time and make it more challenging to grow the business.
That's why Magellan elected to buy out its general partner back in 2010 and exists as a stand-alone limited partner. This corporate structure means that all shareholders are treated equally so there is no conflict of interest, and it ultimately lowers the cost of capital for the business. Lower capital costs mean higher rates of returns for shareholders and part of the reason why Magellan can grow its payout at a high rate.
This is just another reason why Magellan is a great income stock and why anyone looking for a salary supplement should consider it.
Big benefits coming
Verizon hasn't exactly had the best run in 2017. The loss of subscribers in the first half of the year forced the company to reduce the price on some of its postpaid wireless offerings to keep pace with the competition. As smaller competitors have had time to build out their own 4G networks, it has put pressure across the entire industry to offer unlimited data plans that eat into profits. There are also some questions as to what Verizon plans to do with its media arm after the purchase of Yahoo! and how it plans to navigate this new world where companies own both the means of distribution and the content itself.
Those things are likely weighing on some investors minds, and I can see why some people may think that there are some questions about the sustainability of Verizon's 4.4% dividend. There are, however, some major positives coming down the pipe that could easily wipe away some of those concerns.
The first thing to consider is that telecommunications companies are gearing up spending to deploy 5G networks. It's going to take monstrous amounts of capital spending to deploy the infrastructure necessary for a 5G network, so companies with scale and big inflows of operational cash will have an initial leg up. Also, it just so happens that telecom companies like Verizon will be one of the largest beneficiaries of the recent corporate tax overhaul. Not only will it drastically lower their realized tax rate, but it will be able to immediately expense a large portion of its capital spending over the next five years and lower its tax burden even further.
So basically, the company will receive a big incentive to spend on its network over the next several years, and putting its financial firepower into a 5G network would help solidify its customer base and offering to customers over the long haul. That should give investors looking for income some assurance that Verizon's high payout is going to stick around for a while.
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Tyler Crowe owns shares of Magellan Midstream Partners and Verizon Communications. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends Magellan Midstream Partners. The Motley Fool has a disclosure policy.
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