JamesBrey
With the economy facing growing uncertainty, retirees are desperately searching for low-risk, high-yield opportunities that can help them confidently fund their lifestyle. While these opportunities are increasingly rare, they still exist. We discuss two of the best opportunities in this article: National Retail Properties (NYSE:NNN) and Enterprise Products Partners (NYSE:EPD).
#1. National Retail Properties
NNN is a triple net lease REIT that provides a very secure and steadily growing passive income stream for retirees through all types of economic cycles. This is because it employs a business model that includes lengthy lease terms (10-15 years with lease extensions on top of that), very low OpEx, CapEx, and re-leasing expenses and very high free cash flow margins as a result, contractual annual rent increases, conservative underwriting with rent coverage that generally fits in the 2-3x range, and a focus on owning well-located real estate with a high land value component to the investment.
On top of that, it benefits from its significant diversification across 3,349 properties in 48 states with over 380 national and regional retail tenants. As a result, it has generated steadily rising cash flow per share, including a 4.3% CAGR in core FFO per share since 2016 and 33 consecutive years of dividend growth.
NNN’s strategy involves targeting higher cap rate properties with lower credit quality tenants. While some might view this as a risky strategy, the reality has proven this to not be the case. This is because NNN focuses more on the unit level profitability of its real estate rather than the overall corporate balance sheet of its tenants because the security of individual leases is generally much more closely tied to the profitability of the individual real estate assets rather than the strength of the tenants’ balance sheet. This is because high rent coverage and profitability levels often prevent tenants from defaulting on those leases, since they add so much value to the company. Instead, should they experience financial distress, they will be prioritizing renegotiating or even abandoning the leases on their least profitable properties. Furthermore, by commanding higher cap rates from tenants with lower credit ratings, NNN further bolsters its risk-reward across its broadly diversified portfolio of real estate.
With a 99.4% current occupancy rate and undisturbed dividend growth through the Great Financial Crisis and COVID-19 macroeconomic disruptions, NNN’s business model is battle tested.
A couple other reasons to really like NNN right now are its stellar balance sheet with a BBB+ credit rating that gives it access to plenty of capital on attractive terms, as well as its compelling valuation.
NNN currently trades at a meaningful discount to its historical averages on an EV/EBITDA and P/AFFO basis, with current 16.72x EV/EBITDA and 14.42x P/AFFO multiples compared to its 10-year respective averages of 17.63x and 16.62x. Furthermore, its 1.08x P/NAV ratio is at a discount to fellow blue chip peers like Realty Income (O) which sports a 1.15x P/NAV ratio. With a 4.8% dividend yield and solid mid-single digit annualized dividend growth likely in store for the foreseeable future, NNN is a retiree’s dream dividend growth stock that will enable them to sleep well at night through all sorts of economic environments.
#2. Enterprise Products Partners
EPD is probably our favorite retiree investment given its wide moat portfolio of midstream infrastructure assets, industry-best BBB+ rated balance sheet, and world-class management that is very well-aligned with unitholders.
On top of that, it has very stable cash flows from assets that weathered the energy crash and COVID-19 headwinds exceptionally well and also offers investors a very attractive current distribution yield of 7.9% with solid growth prospects ahead.
EPD’s balance sheet is very well positioned to weather any hard times that may hit the energy industry with a 3.1x leverage ratio that is well below its target average along with a whopping $3.3 billion in consolidated liquidity and a weighted average term to maturity on its debt of 20 years. As a result, it is largely immune to the current rising interest rates in the debt markets and is well positioned to compound investor wealth for years to come with little to no risk of financial distress. It is also positioned to opportunistically add a little bit of leverage by either buying back its own equity aggressively, significantly increasing the common distribution, and/or continuing to pursue attractive acquisitions and growth projects to create further wealth for investors.
On top of that, it has one of the very best distribution growth track records in the midstream space, enabling management to highlight on its latest earnings call that:
2022 marks our 24th year in a row for distribution growth, and we think next year, it’ll be 25 years in distribution growth… in talking to a lot of investors given the inflationary environment they’re in, they really appreciate the 5.6% distribution growth year-over-year. That’s helpful to a lot of our individual unitholders.
With a 1.8x distribution coverage ratio, its distribution is not only safe, but appears poised to continue growing at a solid mid-single digit clip for years to come.
Last, but not least, its valuation looks very attractive at the moment, with its units trading at a discount to its historical average and fellow BBB+ rated peers Magellan Midstream (MMP) and Enbridge (ENB) on an EV/EBITDA, P/DCF, and Distribution Yield basis.
Investor Takeaway
Both NNN and EPD are dream retiree stocks given their:
- high current yields
- very dependable cash flows
- rock-solid balance sheets and asset portfolios
- proven management teams
- solid growth potential
- lengthy track records of growing their quarterly payouts and compounding investor wealth
While there are a few other opportunities in both the triple net real estate space and the midstream infrastructure space that we like even more than NNN and EPD, for retirees looking to anchor their income portfolios, these two picks are a great place to start. We rate both as attractive Buys at the moment as we expect them both to continue growing and providing passive income streams to investors for many years to come alongside double-digit annualized total returns.
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JamesBrey
With the economy facing growing uncertainty, retirees are desperately searching for low-risk, high-yield opportunities that can help them confidently fund their lifestyle. While these opportunities are increasingly rare, they still exist. We discuss two of the best opportunities in this article: National Retail Properties (NYSE:NNN) and Enterprise Products Partners (NYSE:EPD).
#1. National Retail Properties
NNN is a triple net lease REIT that provides a very secure and steadily growing passive income stream for retirees through all types of economic cycles. This is because it employs a business model that includes lengthy lease terms (10-15 years with lease extensions on top of that), very low OpEx, CapEx, and re-leasing expenses and very high free cash flow margins as a result, contractual annual rent increases, conservative underwriting with rent coverage that generally fits in the 2-3x range, and a focus on owning well-located real estate with a high land value component to the investment.
On top of that, it benefits from its significant diversification across 3,349 properties in 48 states with over 380 national and regional retail tenants. As a result, it has generated steadily rising cash flow per share, including a 4.3% CAGR in core FFO per share since 2016 and 33 consecutive years of dividend growth.
NNN’s strategy involves targeting higher cap rate properties with lower credit quality tenants. While some might view this as a risky strategy, the reality has proven this to not be the case. This is because NNN focuses more on the unit level profitability of its real estate rather than the overall corporate balance sheet of its tenants because the security of individual leases is generally much more closely tied to the profitability of the individual real estate assets rather than the strength of the tenants’ balance sheet. This is because high rent coverage and profitability levels often prevent tenants from defaulting on those leases, since they add so much value to the company. Instead, should they experience financial distress, they will be prioritizing renegotiating or even abandoning the leases on their least profitable properties. Furthermore, by commanding higher cap rates from tenants with lower credit ratings, NNN further bolsters its risk-reward across its broadly diversified portfolio of real estate.
With a 99.4% current occupancy rate and undisturbed dividend growth through the Great Financial Crisis and COVID-19 macroeconomic disruptions, NNN’s business model is battle tested.
A couple other reasons to really like NNN right now are its stellar balance sheet with a BBB+ credit rating that gives it access to plenty of capital on attractive terms, as well as its compelling valuation.
NNN currently trades at a meaningful discount to its historical averages on an EV/EBITDA and P/AFFO basis, with current 16.72x EV/EBITDA and 14.42x P/AFFO multiples compared to its 10-year respective averages of 17.63x and 16.62x. Furthermore, its 1.08x P/NAV ratio is at a discount to fellow blue chip peers like Realty Income (O) which sports a 1.15x P/NAV ratio. With a 4.8% dividend yield and solid mid-single digit annualized dividend growth likely in store for the foreseeable future, NNN is a retiree’s dream dividend growth stock that will enable them to sleep well at night through all sorts of economic environments.
#2. Enterprise Products Partners
EPD is probably our favorite retiree investment given its wide moat portfolio of midstream infrastructure assets, industry-best BBB+ rated balance sheet, and world-class management that is very well-aligned with unitholders.
On top of that, it has very stable cash flows from assets that weathered the energy crash and COVID-19 headwinds exceptionally well and also offers investors a very attractive current distribution yield of 7.9% with solid growth prospects ahead.
EPD’s balance sheet is very well positioned to weather any hard times that may hit the energy industry with a 3.1x leverage ratio that is well below its target average along with a whopping $3.3 billion in consolidated liquidity and a weighted average term to maturity on its debt of 20 years. As a result, it is largely immune to the current rising interest rates in the debt markets and is well positioned to compound investor wealth for years to come with little to no risk of financial distress. It is also positioned to opportunistically add a little bit of leverage by either buying back its own equity aggressively, significantly increasing the common distribution, and/or continuing to pursue attractive acquisitions and growth projects to create further wealth for investors.
On top of that, it has one of the very best distribution growth track records in the midstream space, enabling management to highlight on its latest earnings call that:
2022 marks our 24th year in a row for distribution growth, and we think next year, it’ll be 25 years in distribution growth… in talking to a lot of investors given the inflationary environment they’re in, they really appreciate the 5.6% distribution growth year-over-year. That’s helpful to a lot of our individual unitholders.
With a 1.8x distribution coverage ratio, its distribution is not only safe, but appears poised to continue growing at a solid mid-single digit clip for years to come.
Last, but not least, its valuation looks very attractive at the moment, with its units trading at a discount to its historical average and fellow BBB+ rated peers Magellan Midstream (MMP) and Enbridge (ENB) on an EV/EBITDA, P/DCF, and Distribution Yield basis.
Investor Takeaway
Both NNN and EPD are dream retiree stocks given their:
- high current yields
- very dependable cash flows
- rock-solid balance sheets and asset portfolios
- proven management teams
- solid growth potential
- lengthy track records of growing their quarterly payouts and compounding investor wealth
While there are a few other opportunities in both the triple net real estate space and the midstream infrastructure space that we like even more than NNN and EPD, for retirees looking to anchor their income portfolios, these two picks are a great place to start. We rate both as attractive Buys at the moment as we expect them both to continue growing and providing passive income streams to investors for many years to come alongside double-digit annualized total returns.
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