Month 153 - 14 A-rated High-yield Stocks for Retirement - April 2024

Situation: Retirement savers increasingly depend on income from bond-like stocks, either through workplace retirement plans and IRAs or cashing quarterly dividend checks. The trick is to find a company that has a clean Balance Sheet and pays a good and growing dividend.

Mission: Use our Standard Spreadsheet to analyze companies that meet our “A-rating” requirements, as detailed in the Appendix.

Execution: see Table of 14 companies.

Analysis: Warren Buffett’s favorite metric is Return on Tangible Capital Employed (see Column T in the Table). He thinks a 20% return for the Trailing Twelve Months (TTM) is a good number. Three companies qualify: JNJ, CSCO, PG. His second point (that the company be “run by able and honest managers”) is addressed in Morningstar Reports (Column AN) and negatively impacted by the degree to which the company is capitalized by issuing long-term bonds (Column X). Three utility companies have a BUY rating from Morningstar (WEC, NEE, LNT), and 8 companies have a Debt to Equity ratio lower than 1.0 (MRK, TRV, GD, ATO, JNJ, WMT, PG, CSCO). Mr. Buffett also likes Free Cash Flow Yield (Column K) to be higher than Dividend Yield (Column J), since Retained Earnings allow the company to expand operations (or pay down debt) at zero cost; 11 companies qualify (MRK, CAT, GD, ATO, JNJ, WMT, PG, LNT, UNP, CSCO, TGT). His third point (that the stock be available “at a sensible price”) is addressed by 1-yr and 5-year Forward PEG ratios (Columns O and P); 7 companies have PEGs under 2.5 at both intervals (MRK, TRV, GD, WMT, WEC, NEE, TGT). Five companies are cited 3 times (MRK, GD, JNJ, WMT, PG, CSCO).

Bottom Line: We’ve set high standards, which tend to favor companies in the 3 defensive industries: Utilities (4), Consumer Staples (2), and HealthCare (2).

Risk Rating: 6 (where 10-yr Treasuries = 1, S&P 500 Index = 5, and gold bullion =10)

Full Disclosure: I dollar-average into MRK, CAT, JNJ, WMT, PG, NEE, UNP and CSCO, and also own shares of TRV, GD, ATO, WEC, LNT and TGT.

Appendix: Criteria for stocks to receive an A-rating: 1) being listed at VYM (the Vanguard High Dividend Yield ETF); 2) being listed on a U.S. Stock Exchange for 20+ years; 3) having at least an A- S&P rating on the corporate bond it issues, 4) having at least a B/M S&P rating on it’s common stock, 5) having a positive earnings per share (TTM), 6) having a positive book value (mrq), 7) having long-term debts no greater than 2.5 times equity, and total debts no greater than 2.5 times EBITDA (unless covered by a positive Tangible Book Value), 8) having a 10-year actual rate of return that is greater than the 10-year required rate of return (RRR), 9) having a 5-year Beta that is lower than 1.00, 10) being listed in Vanguard’s Dividend Appreciation ETF (VIG), which eliminates the 25% of dividend-paying stocks that have the highest dividend yields. (Such high yields are likely to be unsustainable).

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