2 Bargain Blue Chips Retirees Should Buy

Co-produced with “Hidden Opportunities.”

We always hear advice to invest in blue-chip companies. What does that mean, and is it suitable for everyone?

A blue-chip company typically has a proven history of steady growth and competitive advantage. Such companies have a few notable characteristics.

• Longevity and Reliability: Blue-chip companies have usually been in business for decades. They have demonstrated the ability to survive and thrive through difficult economic conditions and recessions.

• Market capitalization: Blue-chip companies are large-cap stocks and are part of leading market indices like the S&P 500 and the Dow Jones Industrial Average.

• Regular and Progressive Dividends: Blue-chip companies maintain strong cash flows and have a history of sharing their profits with shareholders. They typically make regular dividend payments and also buy back stock from time to time.

• Strong Brand Name: A blue-chip company is one you will instantly recognize. They are often industry leaders in their respective domains.

• Creditworthiness: Blue-chip companies hold high creditworthiness. They have proven ability to pay off their debts and other financial obligations.

They say that you should start investing when you are young. It is solid advice, and blue chip stocks must be part of your financial planning. Any long-term investor focused on building a reliable and stable portfolio must consider such robust companies. They typically provide small dividend payments, and you can expect capital appreciation in the long run. So Blue chip stocks in your portfolio are like having your cake to have some time down the road.

But who said you can’t have your cake and eat it too?

You could be a student seeking a few hundred extra a year to pay for your streaming services, wireless bills, or pizza; or you could be someone in your 20s or 30s who can use a few thousand every year to support utility payments, or you could be a retiree seeking income to support your lifestyle. You could use passive income at whatever stage you may be in your life.

We have two blue-chip high-yield stocks that can fulfill your requirements for current passive income while providing portfolio defense and stability. With up to 10% yields, these can brighten your financial well-being with large dividends through good and bad times. Without further ado, let us review these picks.

Pick #1: BCE, Yield 5.9%

BCE Inc. (aka Bell Canada) (BCE)

We live in a world where internet connectivity is becoming as important as the water we drink or the oxygen we breathe. Every year, without even intending to, we consume more data than we did the year before, and this trend is set to continue for the foreseeable future.

Did you know that the cost of the internet in Canada is one of the highest in the world? In 2022, the average internet price in Canada is ~C$95 per month. The Great White North has the 2nd most expensive internet (only behind the U.S.) of the G7 countries for speeds over 41 Mbps and has consistently been the 2nd or 3rd most expensive for at least the past five years. Telecom in Canada is dominated by three major players – Bell Inc., Rogers (RCI), and TELUS (TU), and these companies control 91% of the nation’s telecom business.

Canada has strict laws preventing foreign companies from entering the market, giving the Big Three a firm grip over telecom prices. In addition, we know that the telecom business has a high barrier to entry and long-term asset monetization potential. The Big Three are tight with price coordination and have a strong history of M&A to maintain market dominance. Let’s look at how we can invest in this significant moat.

BCE is the largest telecom company in Canada and has a rich history, being founded by none other than Alexander Graham Bell. BCE paid its first dividend in 1881 and has maintained a phenomenal streak with no missed dividend payments for 140+ years. BCE has sustained 14 years of consecutive dividend increases of at least 5%, making it almost a paying job with reliable annual raises.

Notably, in 2008 the company suspended its dividend for two quarters to preserve cash while finalizing a buyout deal. However, the proposed transaction did not go through, and BCE resumed its dividend towards the end of 2008. Since then, the dividend has been raised by at least 5% yearly.

In Q3, BCE reported 3.2% higher YoY revenues and 13% lower Capex. The company’s free cash flows (“FCF”) from operating activities were up 12.5% and 13.4%, the higher FCF, YoY, due to lower taxes, reduced cash pension funding, and higher adjusted EBITDA. The company is well-positioned in this rising-interest-rate climate by maintaining ~85% fixed-rate debt. BCE’s weighted average after-tax cost of debt was 2.8%, with an average term to maturity of ~14 years. BCE maintains a 3.2x net debt-to-leverage ratio with a comfortable maturity schedule.

Canadian telecom is an attractive sector for dividend investors. They maintain higher profit margins through various moat protections discussed above than their American peers (notice that BCE consistently holds the highest Gross Profit Margins in the peer group).

BCE’s C$0.92/share quarterly dividend calculates to a 5.9% annualized yield.

Notes:

1. BCE declares and pays its dividends in Canadian Dollars. This means U.S. investors will receive a payment that varies based on USD-CAD conversion rates.

2. The Canada Revenue Agency withholds 30% of all dividends paid to non-Canadian investors. But the tax treaty between the U.S. and Canada reduces this withholding percentage to 15%. Additionally, this 15% withholding tax is waived when Canadian securities are held within U.S. retirement accounts.

When the economy is shaky, it is best to buy businesses with inelastic demand, maintain profit margins by passing costs to consumers, and have a significant competitive advantage. BCE is a Canadian telecom giant with a robust dividend payment history through a wide range of economic, geopolitical, national, and international crises. 5.9% yields from this Blue-chip telecom to help you stay calm while everyone anxiously clings to the news online.

Pick #2: ARCC, Yield 10.3%

Did you know that the regulatory framework for Business Development Companies (“BDC”) was created in 1980 to fuel job growth and assist emerging U.S. businesses in raising funds? The primary objective of these institutions was to help the U.S. economy recover from a painful recession by helping small companies survive, operate, and grow. So naturally, when the economy faces headwinds, BDCs see increasing demand for funding and are instrumental in helping put things back on track.

Ares Capital (ARCC) is the largest public BDC, with a stellar track record of raising distributions to shareholders. The BDC has paid growing distributions to shareholders for 10+ years, with several special distributions from solid execution. Since its inception, ARCC has earned every cent it has distributed and maintained adequate coverage for the payments. Source

This blue-chip BDC stands to thrive in this fear-stricken economy. As the credit and leveraged finance markets are exhibiting weak secondary liquidity and slowing new issuance, borrowers tend to seek BDC funding increasingly. The lack of competition from traditional sources makes it highly lender-friendly to BDCs, and ARCC is taking advantage of the situation.

During Q3, ARCC reported an impressive weighted average EBITDA growth of 13% year-over-year. The BDC issued a ~12% increase to its regular quarterly distribution owing to YoY EPS growth. The most recent quarterly distribution of $0.48/share is adequately covered by the quarterly EPS of $0.5 and calculates to a 10.3% forward yield. That yield doesn’t reflect the $0.03 supplemental dividend that ARCC paid each quarter last year, nor the prospect for more supplemental dividends in 2023. ARCC will report earnings on February 7th and is expected to announce its next dividend at that time.

ARCC is quite conservative in lending, with a strong history of prudent risk management. On average, any single investment accounts for <0.2% of the portfolio. Additionally, the BDC has diversified its capital across 458 companies, protecting them significantly against fundamental issues and temporary headwinds faced by a few names. ARCC’s portfolio is 63% senior secured debt, increasing the potential for recovery of invested capital in the event of liquidation. Source.

Think big banks are careful with who they lend? Think again. ARCC’s diligent risk management process is seen from their long-term track record of better net realized loss rates vs. leading banks. Source.

ARCC is well-positioned to handle a hawkish Fed. Don’t you love it when your income increases and your expenses stay the same? ARCC has that going on for it – 73% of the BDC’s total portfolio debt (liabilities) at fair value was in fixed investments, while 87% of the investments (assets) were floating-rate income-producing securities. A calculation issued by ARCC shows that a 100 bps increase in rates would result in a 14% rise in annual NII. Since ARCC purely pays out of its NII, we stand to receive growing distributions.

Conclusion

It is never too early or too late to start investing; you just have to pick the right stocks based on your needs/goals and risk tolerance. The investor community often perceives dividends as a retiree’s strategy, while blue chips are a risk-averse tool to grow their portfolio over the long term. This is incorrect.

Income investing can be useful for everyone. In your early years, you can stash away quality dividend payers in your IRA and snowball your income stream by reinvesting the proceeds. Later on, these dividends can be used to fuel your retirement lifestyle. Blue-chip securities present high safety in the world of equities, and their dividend payability provides much-needed passive income, a critical driver of your early retirement pursuits. Source.

High-yield blue chips provide the best of both worlds – safety and large current income. We discussed two excellent income picks with up to 10% yields to protect your portfolio, boost your income, and sleep well at night.