There comes a time in the lives of most investors when they realize the carefree days of investing in speculative growth stocks and trading in and out of equities before the bytes of the last trade fade on the screen aren’t reliable ways to generate income once they retire. Smart investors on the brink of retiring begin to search for ways to generate steady income with low risk of loss on their investments.
It’s an increasingly difficult transition in the current market with a shrinking pool of high-yield bonds and equities at acceptable risks. The Fed has backed savers into a corner with policies creating microscopic returns on saving accounts and CDs, forcing investors to look for yield at increasing levels of risk. The return on a 10-year Treasury is about 2.5%. If you had $1 million looking for a risk-free retirement parking place and you bought the 10-year, you would be living not-so-large on $24,800 per year. Sound like a great way to spend your golden years?
Over the past couple of years, investors desperately seeking yield have turned to equities. They take on more risk for better returns and what they get is a hot stock market and lower dividend yields. The investment landscape is all rocks and hard places and turning over a lot of rocks is the only way to start putting together a decent portfolio. The market is beginning to crack and volatility is up. Now is the time to start sifting through high-dividend payers looking for port-worthy investments. Not all dividend stocks are created equal.
What to look for:
- Yield above 3.5%
- Record of rising dividends
- Sustainable payout ratio
- Low debt
- Consistent free cash flow
- Low capital spending needs
- Stable business and demand
- High free cash flow yield
- Low enterprise value/revenue (EV/EBITDA)
Three consistent dividend-paying stocks
All three of these companies’ growth stalled in the past year, but they continue to pay a reasonable yield and have positive free cash flow with manageable debt. In fact, both Garmin Ltd. (NASDAQ:GRMN) and Paychex, Inc. (NASDAQ:PAYX) have no debt. Landauer Inc (NYSE:LDR) took on uncharacteristic levels of leverage in 2012 for an acquisition after years of no borrowings. Garmin has the lowest payout ratio suggesting it may have room to pay more.
Income with low risk
Garmin Ltd. (NASDAQ:GRMN) provides global positioning systems that use satellite technology to pinpoint the users exact location. The company has outdoor, fitness, marine, automotive and aviation products and applications. As competition increases and the market matures, the company’s best growth is behind it . Revenue peaked in 2008 along with the share price and has been in decline ever since. However, the rate of revenue decrease has decelerated and it looks like it may find equilibrium. Garmin Ltd. (NASDAQ:GRMN) has no debt and predictable positive free cash flow with a multi-year history of increasing the dividend.
The stock price has never approached the 2007 and 2008 highs of $120 and never will. It’s currently near a 52-week low at $36 and the dividend yield is 5.2%. If revenue stabilizes, current cash flow should support at least the recent annual dividend payout. It will never make an investor rich, but could provide income with low risk of capital loss. Garmin Ltd. (NASDAQ:GRMN)’s low operating margin will increase as a one-time charge works its way through last quarter.