In your 60s, your investment goals are likely to shift from capital accumulation to a mixture that includes more of a focus on safety and income. As you look to start living off of your nest egg, large U.S. utility Duke Energy Corporation (DUK 2.41%) and consumer product giant The Procter & Gamble Company (PG 0.54%) can help you make the transition to a new way of thinking about your portfolio. Here's what you need to know about this pair of high-yielding stocks.
Boring but steady
There's no way around it -- Duke Energy is a pretty boring company. Its core business is a collection of regulated utilities that sell electricity and natural gas to a combined 9.2 million customers. In addition, the company owns midstream natural gas pipelines and a renewable-energy merchant power business. Electric utilities are the core of Duke's operation, providing 88% of its earnings, with gas utilities and pipelines chipping in 9% and the rest coming from its merchant operations.
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As a largely regulated utility, Duke has a monopoly in the regions it serves. In exchange for that, it must get its rates approved by regulators. The end result of this arrangement is generally slow but steady growth. For example, Duke is projecting earnings and dividend growth of 4% to 6% a year through 2022. However, to get rates approved by regulators, it has to invest in its business. On that front, Duke is planning to spend $37 billion between 2018 and 2022 on things like new power plants, upgrading power lines, and midstream pipelines construction.
Although 4% to 6% earnings and dividend growth doesn't sound all that exciting, you have to take into consideration three factors. First, the projected dividend growth exceeds the historical growth rate of inflation, which means your buying power will grow over time. Second, the starting yield here is currently a robust 4.8%, more than twice what you would get from buying an S&P 500 index fund. And third, Duke's beta is an ultra-low 0.12 -- that means the stock is roughly 90% less volatile than the broader market.
PG Beta (5Y) data by YCharts
Duke is a high-yield, cornerstone investment -- slow, steady, and reliable. As you shift investment gears in your 60s, it's the type of holding on which you can build a broader income portfolio.
Changing with the times
This is where Procter & Gamble comes in. This global consumer products giant owns iconic brands like Bounty, Gillette, and Pampers. However, it's facing notable headwinds today as consumer buying habits shift toward more natural products and buying online over in-store. Procter & Gamble's sales have been sluggish. Investors have responded by pushing the shares lower by around 20% so far this year. And the yield is up to nearly 4%, the high end of the company's historical range.
You shouldn't think about Procter & Gamble as a manufacturer, but rather as a brand manager. Although the brands will change over time, the company's skill in marketing, product development, and distribution remain a constant source of differentiation. And Procter & Gamble isn't sitting still.
PG Dividend Yield (TTM) data by YCharts
It just worked through a major brand overhaul, offloading brands that were smaller and less profitable so it could focus on its most important brand assets. It's also been adjusting to consumer preferences, bringing out more natural products. And it has been making tough decisions to take on upstart competition from the internet, like cutting prices in its shaving care business to preserve market share (the cuts will hit the one-year mark later in 2018).
There's short-term pain involved with many of these decisions, like falling sales and weak earnings growth. And while it's entirely possible that the changes its making won't be enough to get the company's top line growing again, Procter & Gamble has a 62-year streak of annual dividend increases behind it. You don't build a record like that without working through some tough periods.
If more change is needed, which could include more material shifts to its brand lineup if its current brands have truly lost their cache, it will keep adjusting. Long-term debt, meanwhile, is a modest 30% of P&G's capital structure -- it has the balance sheet to survive a transition like the one it's facing today. If you can think long-term while other investors are thinking short-term, Procter & Gamble can provide you a nice mix of high-yield and recovery potential.
Balancing the portfolio for your retirement years
The utility Duke Energy is a stable company that offers a high yield and the prospects of slow and steady growth. It's the low-risk cornerstone of a diversified portfolio that includes more aggressive investments like Procter & Gamble, a stock that's out of favor today because of industry changes to which the consumer product giant is working to adjust. You can collect a relatively high yield while it does so, and benefit from the recovery potential as investors realize it is succeeding.
