The 3 Safest 8+% Yielding Blue-Chips Retirees Can Trust Right Now (2024)

(Source: Imgflip)

Retirees LOVE high-yield stocks because it helps to pay for living expenses without having to sell shares.

Theoretically, if your portfolio generates enough safe income, that grows faster than inflation

• You never have to worry about your portfolio value since you never have to sell anything to meet your financial goals.
• Your standard of living in retirement will rise over time since dividends are growing faster than inflation.

But of course, we can't forget that we're now facing an unprecedented global health and economic crisis.

During periods of crisis, dividends can be slashed and over 250 companies have already cut or suspended dividends.

The estimates for the S&P 500's dividend cuts in 2020 range from 13% from Citi to 25% from Goldman, which means that we could be facing a Great Recession level of income hits for retirees.

Fortunately, ultra-high-yielding blue-chips do exist that retirees can trust with their savings. Here's how I found the three safest 8+% yielding dividend blue-chips retirees can consider buying right now.

Finding The Safest Ultra-High Yielding Blue-Chip Retirees Can Rely On In This Economy

As with all my articles I use the Dividend Kings Research Terminal Screening tool which is something our team has spent over 3,000 man-hours creating over the past year.

It allows our members to quickly and easily determine the best companies for their needs no matter what the economy or broader market is doing.

(Source: Dividend Kings Company Screening Tool) green = potentially good buy or better, blue = potentially reasonable buy.

I begin every screening by selecting for potentially reasonable or good buys (or better) based on an appropriate margin of safety given a company's quality and risk profile.

Dividend Kings Quality Rating System

There are 279 reasonable to attractively priced companies in the 439 company DK Master List, which includes

• all dividend aristocrats
• all dividend kings
• all 11/11 quality Super SWANs
• all 9/11 blue-chip quality dividend achievers (10+ year dividend growth streaks)

Now let's screen for quality, beginning with quality and safety ratings.

• 4/5 above-average or better dividend safety (179 companies remain)
• 9/11 blue-chip quality or better (102 companies remain)

My safety scores are not pulled from thin air but based on historical dividend cut risk during recessions since WWII.

(Sources: Moon Capital Management, NBER, Multpl.com)

Dividend Kings Safety Scores

Using historical recessionary dividend cut data, and comparing the blue-chip economist consensus (16 most accurate economists tracked by MarketWatch) estimates of how bad this recession might be compared to historical norms, I can estimate the risk of a dividend cut in the worst recession in 75 years.

Dividend Kings Safety Model

The dividend safety score is a very robust model that incorporates up to 15 safety metrics, each one based on historical data that pertains to historical dividend cut data or long-term company solvency.

I NEVER just "guess" about safety, quality, valuation, long-term return potential, or overall prudence. Rather, I use a methodical evidence-based and data-driven approach which I recently outlined for DK members in an upcoming detailed exclusive video called

• How To Invest Better Video: Analyzing A Company For Safety, Quality, Valuation, Return Potential & Investment Prudence

(Source: Imgflip)

Next, let's tighten up our safety and quality even more by considering credit ratings.

(Sources: Dividend Kings Investment Decision Tool, S&P, The University of St. Petersberg)

Let's eliminate anything that isn't BBB rated or better, meaning a 7.5% or less risk of long-term bankruptcy.

• 97 companies remain

Finally, let's crank up our safety to 11 by applying one final screen, dividend growth streaks.

(Source: Imgflip)

Ben Graham was

• the founder of modern securities analysis
• the father of value investing
• Buffett's mentor
• one of the best investors in history

He considered a 20-year streak without dividend cuts a sign of quality, and I extrapolate that to mean that a 20-year dividend growth streak meets the "Graham Standard of excellence."

Applying the 20-year dividend growth streak to our screen results in results in 32 companies remaining that have

• reasonable to attractive valuation
• above-average dividend safety (6% or less chance of a dividend cut in this recession)
• blue-chip quality or better
• a strong BBB rated balance sheet or better (7.5% or less 30-year bankruptcy risk)

(Source: Dividend Kings Company Screening Tool) green = potentially good buy or better, blue = potentially reasonable buy.

Every Tool in the Research Terminal can be sorted by any column, so I sorted by yield and then removed any speculative companies (due to pandemic affects).

This gives us the three safest 8+% yielding blue-chips retirees can trust to generate generous and safe income in this recession.

1. Enterprise Products Partners (EPD): 10.1% yield, 11/11 quality Super SWAN
2. Altria (MO): 8.8% yield, 9/11 quality blue-chip dividend king
3. Enbridge (ENB): 7.8% yield, 11/11 quality Super SWAN

Why these three high-yield blue-chips in particular? I'll walk you through the DK Investment Decision Matrix in a second but their average fundamentals will mostly answer this question.

Fundamental Stats On These 3 High-Yield Blue-Chips

• Average quality score: 10.3/11 Blue-chip quality vs. 9.6 average dividend aristocrat
• Average dividend safety score: 4.7/5 very safe vs. 4.5 average dividend aristocrat (about 2.5% dividend cut risk in this recession)
• Average FCF payout ratio: 73% vs. 84% industry safety guideline
• Average debt/capital: 57% vs. 60% industry safety guideline vs. 37% S&P 500
• Average yield: 9.1% vs. 2.0% S&P 500 and 2.4% aristocrats
• Average discount to fair value: 37% vs. 24% overvalued S&P 500
• Average dividend growth streak: 31.7 years vs. 25+ aristocrats, 20+ Graham Standard of Excellence
• Average 5-year dividend growth rate: 10.0% CAGR vs. 8.3% CAGR average aristocrat
• Average long-term analyst growth consensus: 4.7% CAGR vs. 6.4% CAGR S&P 500
• Average forward P/E: 7.7 vs. 21.1 S&P 500
• Average earnings yield: 13.0% vs. 4.7%% S&P 500
• Average PEG ratio: 1.91 vs. 3.03 historical vs. 2.48 S&P 500
• Average S&P credit rating: BBB+ vs. A- average aristocrat (5% 30-year bankruptcy risk)
• Average annual volatility: 20.7% vs. 22.5% average aristocrat (and 26% average Master List stock)
• Average Market Cap: $64 billion large-cap
• Average 5-year total return potential: 9.1% yield + 4.7% CAGR long-term growth + 9.7% CAGR valuation boost = 23.5% CAGR (16% to 31% CAGR with 30% margin of error)
• Probability weighted expected average 5-year total return: 9% to 25% CAGR vs. 2% to 7% S&P 500
• Mid-Range Probability-Weighted Expected 5-Year Total Return: 17% CAGR vs. 5% S&P 500

These three high-yield SWANs, if equally weighted, would represent a collection of companies that

• yield 9.1% (4.5X that of the broader market)
• have dividend safety slightly superior to the dividend aristocrats
• have an average BBB+ credit rating
• have a dividend growth streak of 32 years (dividend aristocrat)
• are expected to deliver over four times the total returns of the S&P 500 over the next five years

So let's take a quick look at what makes these three high-yield SWANs such potentially attractive long-term investments for conservative income investors, such as retirees.

Enterprise Products Partners: The Highest Quality And Safest Name In Midstream (uses K-1 tax form)

• Operating cash flow consensus +2% (no change in safety, quality or valuation)
• consensus growth estimate unchanged at 0% to 7% CAGR, 2.1% CAGR consensus.
• Current price: $17.63
• 2020 average fair value estimate: $34
• Discount: 48%
• Historical fair value: 11 to 13 P/OCF (12 mid-range)
• Current P/OCF: 6.0 (pricing in about -1.3% CAGR growth per Graham/Dodd fair value formula)
• Safety score: 5/5 very safe (2% to 3% dividend cut risk in this recession, 0.5% in normal recessions)
• Quality score: 11/11 Super SWAN
• DK rating: potentially anti-bubble/ultra-value buy
• 2025 consensus return potential: 19% CAGR
• 2022 consensus return potential: 33% CAGR
• 5-year mid-range probability-weighted return (PWR): 14% CAGR

EPD 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If EPD grows as expected and returns to the mid-range of historical fair value, then it would be expected to generate over 150% total returns over the next five years or about 19% CAGR.

Historically EPD tends to outperform expectations.

I use the historical margin of error to adjust the analyst consensus growth range into a realistic long-term growth range which is then used for long-term return potential range modeling.

EPD 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Even with a period of negative growth over the medium-term, created by the worst oil crash in history, the 2022 consensus return potential on EPD is over 100%, or about 33% CAGR.

Now compare EPD's consensus return potential to the lower-yielding and grossly overvalued S&P 500.

S&P 500 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

The market's historical blended PE is 16.5 to 17.5, with a 20 year and 11-year average of 17.0.

S&P 500 Historical Market-Determined Fair Values

(Source: F.A.S.T Graphs, FactSet Research)

In the modern era of low-interest rates, Fed QE, and debt-funded buybacks, the market's long-term (10+ year) historical PE multiple has NOT expanded as many people might expect.

Why do I consider 10+ year time frames the most significant when looking at market-determined fair value multiples?

Because it takes six years for fundamentals/valuations to drive the majority of total returns (54%). For time periods of 5 years or less sentiment (i.e. "momentum") explains the majority of returns.

But over 10+ years 90% to 91% of returns are a function of fundamentals with valuation changes tending to cancel out due to mean reversion.

In other words, barring some permanent and significant change to capital markets, such as the Fed capping long-term interest rates below their long-term bond market implied 2.5% normal rate (on the 10-year yield), or the Fed directly buying US stocks, the market's historical 16.5 to 17.5 blended PE is likely to remain a good proxy for fair value on US stocks.

Market-determined fair value is NOT an opinion it's an objective fact, created by hundreds of millions of investors risking real money and paying a certain multiple for corporate earnings.

Through 2022, if the market were to return to historical fair value and earnings grow as expected, about 3% CAGR total returns could be expected.

Of course, as we just saw the market is free to blow itself into a bubble for many years, and so the market might pull forward future returns for months, or even several years longer before the bubble pops.

But rest assured that eventually fundamentals/valuation will likely reassert themselves, and high valuations will result in lower returns than investors have historically enjoyed.

How much lower?

S&P 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

6% CAGR is the broader market's 5-year consensus return potential, which is below the S&P 500's 7% to 9% CAGR historical return range.

Of course, consensus return potentials are only valid IF earnings grow as expected and valuations revert to historical market-determined fair value.

We can't know 5 years in advance whether the market will still be in a bubble (it could be) or in a bear market.

This is why we must make adjustments for both margins of error on the Gordon Dividend Growth Model (what DK and most asset managers use and what's shown here) as well as the 20% to 40% probability that analysts are just plain wrong about how fast earnings will grow.

(Source: Dividend Kings Investment Decision Tool)

When applying the appropriate margins of error, we can see the S&P 500's 5-year expected return is 2% to 7% with a mid-range value of 5% CAGR.

That is the benchmark that the Dividend King's Investment Decision Tool uses to judge any potential investment today, vs the default benchmark most people use.

That's based on three criteria, preservation of capital (not losing money), dividend return potential (getting our money back reducing risk of permanent realized losses), and long-term total returns (sufficient total returns to meet our financial goals).

(Source: Dividend Kings Investment Decision Tool)

Here is the rubric we use in the Investment Decision Tool.

So, now let's see how EPD compares.

Putting It All Together

• Preservation of capital: BBB+ stable outlook credit rating = 5% or less 30-year bankruptcy risk = 4/5
• Return of capital: % yield and % CAGR growth rate = % average yield over the next 5 years = % dividend return on investment vs 12% S&P 500 = 3/5
• 5-year Probability-Weighted Return: % CAGR vs 4% S&P 500 = 5/5

EPD Distribution Return Potential

(Source: Dividend Kings Investment Decision Tool)

EPD's very safe double-digit yield is capable of returning over half of your investment in the form of tax deferred distributions, which is 4.4X more than the S&P 500.

EPD Return Potential Matrix

(Source: Dividend Kings Investment Decision Tool)

EPD's expected return over the next five years, even adjusting for all the uncertainties that go into long-term return modeling, is 14% vs 5% for the broader market.

EPD Decision Matrix

(Source: Dividend Kings Investment Decision Tool)

The DK Investment Decision Tool is designed to summarize every possible investment decision into an easy to understand guideline based on letter grades that everyone is familiar with.

(Source: Dividend Kings Investment Decision Tool)

EPD is offering a potentially good alternative for anyone comfortable with its risk-profile and K1 tax form, relative to the broader market, from the perspective of conservative income investors seeking maximum safe yield.

Altria: The Most Undervalued Dividend King

• EPS consensus unchanged from last update 2 weeks ago (no change in safety, quality or valuation)
• Consensus growth estimate unchanged at 3% to 6% CAGR (Fitch estimates 7% CAGR)
• Current price: $38.19
• 2020 average fair value estimate: $60
• Discount: 37%
• Historical fair value: 14 to 15 PE (14.5 mid-range)
• Current PE: 9.0 (pricing in about 0.3% CAGR growth per Graham/Dodd fair value formula)
• Safety score: 4/5 above-average (4% to 6% dividend cut risk in this recession, 1% in normal recessions)
• Quality score: 9/11 blue-chip
• DK rating: potentially very strong buy
• 2025 consensus return potential: 20% CAGR
• 2022 consensus return potential: 32% CAGR
• 5-year mid-range probability-weighted return (PWR): 15% CAGR

MO 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

MO 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Putting It All Together

• Preservation of capital: BBB stable credit rating = 7.5% or less 30-year bankruptcy risk = 3/5
• Return of capital: 8.8% yield and 5.6% CAGR growth rate = 510.2% average yield over the next 5 years = 51% dividend return on investment vs 12% S&P 500 = 5/5
• 5-year Probability-Weighted Return: 15% CAGR vs 5% S&P 500 = 5/5

MO Decision Matrix

(Source: Dividend Kings Investment Decision Tool)

MO's stronger growth potential than EPD means that even with a slightly weaker but still good BBB credit rating, it scores equally well on the decision matrix courtesy of slightly stronger long-term return potential.

Enbridge: The Best Non-K1 Choice For Safe Midstream Investing

• OCF consensus up $0.01 (0.3%) since the last update on June 1st (no change in safety, quality or valuation)
• Consensus growth estimate up from 1% to 7% CAGR to 4% to 8% CAGR (management long-term guidance 5% to 7% CAGR)
• Current price: $29.63
• 2020 average fair value estimate: $41
• Discount: 27%
• Historical fair value: 9 to 10 P/OCF (9.5 mid-range)
• Current P/OCF: 7.9 (pricing in about -0.3% CAGR growth per Graham/Dodd fair value formula)
• Safety score: 5/5 very safe (2% to 3% dividend cut risk in this recession, 0.5% in normal recessions)
• Quality score: 11/11 Super SWAN
• DK rating: potentially very strong buy
• 2025 consensus return potential: 16% CAGR
• 2022 consensus return potential: 23% CAGR
• 5-year mid-range probability-weighted return (PWR): 12% CAGR

ENB 2025 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

ENB 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Putting It All Together

• Preservation of capital: BBB+ credit rating = 5% or less 30-year bankruptcy risk = 4/5
• Return of capital: 7.8% yield and 6.5% CAGR growth rate = 9.2% average yield over the next 5 years = 46% dividend return on investment vs 12% S&P 500 = 3/5
• 5-year Probability-Weighted Return: 12% CAGR vs 5% S&P 500 = 5/5

ENB Decision Matrix

(Source: Dividend Kings Investment Decision Tool)

Enbridge's long-term growth outlook has improved remarkably in recent weeks.

(Source: YCharts)

The growth consensus range from FactSet, YCharts, and Reuters'/Refinitiv is 5.5% to 6.5% well within management's long-term guidance of 5% to 7% CAGR.

Applying the historical margin of error to the consensus growth range gives us 4% to 8% CAGR expected growth for ENB, which is among the best of any midstream operator in North America.

8% yielding ENB might not offer the same yield as EPD, but its stronger growth outlook combined with a still very generous 46% expected dividend return over the next 5 years.

ENB is set to become a dividend aristocrat (a 24-year growth streak currently, adjusted for currency) with the next dividend hike expected in early 2021.

ENB and EPD are both Super SWANs and 4 of 5 safe midstream SWANs or better than are on the DK Phoenix list.

Bottom Line: Maximum Safe Yield Requires A Focus On Quality First And Prudent Valuation & Risk Management Always

By no means do I say that retirees should put 100% of their portfolio in Enterprise, Altria, and Enbridge.

I wouldn't recommend more than 7% in each, meaning 21% or less overall equity portfolio exposure.

Failed Aristocrats 2007 to 2017

(Source: Ploutos) MO did not cut its dividend when adjusted for spin-offs, it's still a dividend king

Even the legendary dividend aristocrats can and do cut their payouts and lose their status over time.

CCC List Companies Cutting Or Suspending Dividends Since Pandemic Began

(Source: Justin Law)

About 12% of the David Fish CCC list (now run by Dividend King Justin Law) have cut or suspended dividends so far. That includes four dividend champions, one that had a 47-year dividend growth streak.

Credit ratings, dividend growth streaks, debt metrics, payout ratios, all are a great way to estimate dividend safety in normal recessions.

But this isn't a normal recession and the closure of a company's businesses can result in

• debt metrics rapidly rising
• credit ratings being slashed (CCL went from A- to BB+ in a matter of months)
• payout ratios soaring or even turning negative
• 25+ year growth streaks being snapped by financial necessity

Dividend Kings updates our Master List every week, targeting the most popular blue-chip companies and our highest conviction ideas.

I update high-risk industries every few months, such as Financials, Energy, and REITs (especially retail) as well.

ENB, MO, and ENB are showing remarkable resilience in this recession, and barring a far worse economic outcome than currently expected from blue-chip economists and the Fed, represent a minimal risk to their mouth-watering dividends.

So as part of a diversified and prudently risk-managed portfolio these three Phoenix watchlist companies, which DK and I both own, represent the three safest 8+% yielding blue-chips retirees can consider today.

While no dividend is ever guaranteed, the risk of these three legendary income payers cutting their dividends is 6% or less, even in the worst recession in 75 years.

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