Many retirees look to fixed-income investments like Guaranteed Investment Certificates (GICs) or bonds for, well, fixed income. Rising interest rates since 2022 have also made life more challenging for retirees who are focused on investments that provide predictable but largely fixed income. Retirees might need to plan their retirement better.
Retirees can potentially boost their income with dividend stocks. You could even get more income from price appreciation if you take a more active approach in your investing, but it would also mean more work on your part. So, dividend stocks with high yields may be the sweet spot to be in with the target to buy and hold.
Higher interest rates have also particularly weighed on the valuations of stocks that have sizeable debt on their balance sheets, including Enbridge (TSX:ENB) and BCE (TSX:BCE). This phenomenon has pushed up the dividend yields of these dividend-growth stocks.
Enbridge stock
Enbridge is a North American energy infrastructure giant that generates substantial cash flow across a diversified group of clients, of which 95% are investment grade. It’s a capital-intensive business, which makes it difficult for new entrants. For example, from 2019 to 2022, Enbridge’s capital investments were north of $24 billion, using up about 61% of its operating cash flows.
That said, the fact that ENB stock has paid dividends for about 70 years and increased its common stock dividend for about 27 consecutive years is a testament of the viability of its business model.
Despite a higher interest rate environment, Enbridge maintains a solid balance sheet with an investment-grade S&P credit rating of BBB+. The energy stock targets to pay out 60-70% of its distributable cash flow (DCF) as dividends. Through 2025, management forecasts DCF per share growth of about 3% per year, which should translate to dividend growth with a similar rate. Post 2025, management thinks DCF per-share growth can jump to approximately 5%. So, it’s possible for dividend growth to prop up to about that level then, too.
At $49.47 per share at writing, the high-yield stock offers attractive current income for retirees with a dividend yield of close to 7.2%. Analysts also think the stock could potential climb 18% over the next 12 months.
BCE stock
Big telecom BCE is a familiar name to Canadians. Like Enbridge, it requires tonnes of capital investments to maintain and improve its infrastructure. From 2019 to 2022, BCE’s capital investments were over $20 billion, using up about 63% of its operating cash flows.
Still, BCE has raised its dividend like clockwork for the last 14 years or so. Its 10-year dividend-growth rate is 5.2%. And its last dividend hike was 5.2% a few months ago in February.
Despite a higher interest rate environment, BCE maintains a solid balance sheet with an investment-grade S&P credit rating of BBB+. At $60.28 per share, BCE provides the biggest dividend yield of about 6.4% among the big Canadian telecom stocks. Additionally, the analyst consensus 12-month price target suggests near-term upside potential of about 8%.
Retirees’ takeaway
Retirees can buy and hold dividend stocks to boost their current income. You can start with higher-yielding stocks, but it would be better to pick ones that increase their dividends over time versus ones that don’t. And aim to buy stocks at discounts if possible, so as to better protect your capital. Generally, you would want to mix in some that might have lower yields but higher dividend growth as well. The idea is to build a diversified portfolio of dividend stocks that could increase your income every year as a whole faster than inflation.
