For many people entering retirement, it can be a time filled with pursuing new interests, taking long-desired vacations, and spending extra time with family. Without the security of employment, however, the fear of financial strain can be foreboding and detract from the luster of the golden years. Consequently, many investors will turn to dividend stocks to provide the security of another income stream. But choosing the right one can be confusing.
Through the power of compounding, for example, monthly dividend-paying stocks which offer smaller but regular distributions may entice younger investors who have a multi-decade time horizon and are not in immediate need of the capital. Retirees, on the other hand, fall into a different boat. Oftentimes, they're needs are more immediate, and they rely on larger dividend payouts to supplement their other sources of income like social security checks and retirement accounts. So let's take a look at three dividend stocks -- all hailing from the utilities sector -- which may be the "right fit" for retirees: Consolidated Water (CWCO 1.26%), OGE Energy Corp. (OGE 0.51%), Pinnacle West Capital Corp. (PNW 0.39%).
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Come on in, the water's fine
You may not know Consolidated Water by name, but if you've visited the Caribbean, there's a good chance you've benefitted from its services. Besides operating seven plants to provide drinking water on Grand Cayman, Consolidated Water produces up to 12 million gallons of water daily for Nassau in the Bahamas, and it provides water solutions in Belize and the British Virgin Islands. But the company isn't solely setting its sights on the Caribbean. For example, the company operates a seater desalination plant in Bali, Indonesia, and it's currently developing a seawater desalination project Baja California, Mexico.
In terms of its financials, Consolidated Water offers a compelling choice for retirees, who usually favor more conservative opportunities. Consolidated Water, for example, has zero debt on its balance sheet and $42 million in cash and cash equivalents as of the end of Q3 2019. Additionally, the company represents a lower-risk option for investors since it often enters long-term supply agreements, ensuring that the company has clarity into its future finances. The stock offers a dividend yield of 2.1%, and the company has averaged a payout ratio of 74% over the past five years which suggests that investors can rest assured the company's not jeopardizing its financial health in order to reward shareholders.
This Okie stock looks more than okay
Whereas OGE Energy, an energy delivery company that deals in electric transmission and distribution and energy services operations, hasn't garnered a place on the list of Dividend Aristocrats, the company's commitment to rewarding shareholders is noteworthy. Based in Oklahoma, OGE Energy proclaims on its website that it's in rarefied air among utility stocks as it has never reduced its dividend since hitting the public markets in 1947. In terms of more recent history, the company's dedication to shareholders is evidenced by the fact that the company has grown its annual dividend payment at a compound annual growth rate of 9.5% from 2012 through 2019.
Currently, OGE Energy's stock offers investors a dividend yield of 3.7% -- an attractive amount considering the Vanguard Utilities Index Fund ETF offers a yield of 2.97%. This may raise the eyebrows of circumspect investors, but the company's average payout ratio of 59% over the past five years should allay concerns that the company is being fiscally irresponsible with its dividend. And if that's not enough, perhaps the fact that Moody's, S&P's Global Ratings, and Fitch Ratings have all assigned investment grade credit ratings to OGE Energy will mitigate the fears of risk-averse investors even more.
Finding value in the Grand Canyon state
With the help of its affiliates, Pinnacle West Capital has been providing energy and energy-related services to the people of Arizona for over 125 years. The company's principal subsidiary, Arizona Public Service (APS) is the state's largest and longest-serving electric company. Although the fact that APS relies on coal for about 23% of its annual energy generation raises an eyebrow, the company has articulated a dedicated interest to reducing its reliance on the fuel source, expecting to be completely coal-free in the next 20 years. Nuclear power and renewables, on the other hand, accounted for about 31% and 8% of its portfolio in 2018.
Turning to the Pinnacle West's stock, we find that it currently offers investors a 3.6% dividend yield. Similar to OGE Energy, skeptics may fret over the seemingly-high yield, but a look at the company's payout ratio -- a five-year average of 62% -- should help to quash any qualms regarding the company's financial health. Moreover (again like OGE Energy) Pinnacle West has investment grade credit ratings from Moody's, S&P, and Fitch, suggesting the balance sheet is in good shape.
Image source: Pinnacle West.
While there's no guarantee that Pinnacle West will continue raising its dividend in the years to come, the fact that the company has a proven track record of increasing the capital it returns to shareholders suggests that more dividend raises are likely in the future.
The final word on these dividend darlings
While Consolidated Water, OKE Energy, and Pinnacle West all represent worthy considerations for dividend-minded retirees, those seeking to expose themselves to the least amount of risk may favor Consolidated Water and its zero-debt balance sheet. In the case of all three companies, however, retirees would be well-served to watch the payout ratios to see if they creep too high -- a sign that the company's dividend may be in jeopardy.
