Current times are among the most challenging for creating a retirement portfolio or ensuring that retirees get positive returns (adjusted for inflation). Even with aggressive contractionary monetary policies, inflation has remained stubbornly high in the United States. In the current scenario, individuals will witness erosion of purchasing power by investing in risk-free assets.
It’s essential to invest in stocks. However, it would be equally suicidal to go significantly overweight on high-beta stocks or growth stocks. A good idea is to invest in high-yield dividend stocks for retirees.
Even amidst challenging macro-economic conditions, there is some good news for investors. High-yield dividend stocks for retirees are also trading at attractive valuations. Besides regular cash flows, I expect capital gains from these high-yield dividend stocks. This will help in beating inflation and increasing the purchasing power of a retirement portfolio.
Let’s discuss four high-yield dividend stocks for retirees that trades at an attractive valuation.
Rio Tinto (RIO)
As a diversified industrial commodities company, Rio Tinto (NYSE:RIO) is worth grabbing at a forward price-earnings ratio of 7.03. It’s also among the high-yield dividend stocks for retirees with a robust yield of 12.47%.
Since the focus is on dividends, it’s worth noting that Rio reported free cash flow of $7.1 billion for the first half of 2022. Dividends are therefore sustainable. Further, Rio has a strong balance sheet with a positive net cash position of $300 million. There is ample flexibility to invest in growth projects. I also like the fact that Rio is diversifying into industrial commodities that are likely to see robust demand. As an example, the company is likely to be the “largest source of lithium supply in Europe for at least the next 15 years.” With surging demand for lithium on the back of EV adoption, Rio is positioned to benefit.
The energy sector has also presented some attractive investment opportunities. Chevron Corporation (NYSE:CVX) stock is my pick with a current dividend yield of 3.29%. I believe that CVX stock is positioned for sustained dividend growth if oil trades above $80 in the coming years.
To underscore my view, Chevron reported operating cash flow of $13.3 billion for Q2 2022. The annual cash flow potential is therefore $40 billion. Strong cash flows are on the back of high oil price and low break-even oil assets.
Chevron expects to invest $15 to $17 billion annually in the next few years. Even after these investments, the company’s free cash flow is likely to be in excess of $15 billion. This would provide ample headroom for dividend growth and aggressive share repurchase. The company has already guided for annual buyback in the range of $5 to $15 billion.
It’s also worth mentioning that CVX stock has surged by 49% in the last 12 months. If oil remains well above $80 per barrel, the stock is likely to trend higher for this investment grade balance sheet company.
Newmont Corporation (NEM)
Gold has been depressed with aggressive contractionary policies translating into a stronger dollar. However, with factors of inflation, geopolitical tensions, ballooning of global debt and economic uncertainty, I would bet on a strong reversal for gold.
Newmont Corporation (NYSE:NEM) is a high-quality pick from the gold mining sector. After a correction of 32% for year-to-date 2022, NEM stock looks undervalued. The stock also offers a robust dividend yield of 5.21%.
Specific to Newmont, the company has an investment grade balance sheet with net-debt-to-adjusted-EBITDA of 0.3. Further, Newmont has a robust liquidity buffer of $7.3 billion. A healthy credit profile will ensure that dividends sustain. Also, if gold is back to $2,000 an ounce, there is visibility for dividend growth. Newmont also has a strong asset base with 96 million ounces of gold reserves in addition to 114 million ounces in resources. The company expects to sustain production into 2040s. Once sentiments reverse for gold, cash flows will swell.
Pfizer (NYSE:PFE) is also among the top high-yield dividend stocks for retirees. The current dividend yield of 3.58% is attractive and PFE stock trades at a forward price-earnings ratio of 8.68. The downside seems capped while the upside can be meaningful.
It’s worth noting that Pfizer reported $29.9 billion in free cash flow for 2021. This was on the back of covid-19 vaccine sales. FCF is likely to remain robust even for the current year.
The key point is that Pfizer has strong financial flexibility to invest in the deep pipeline of drug candidates. For the year, Pfizer expects to invest $12 billion in research and development.
With several late-stage drug candidates, the company has revenue growth visibility. Pfizer has also been active on the acquisition front in the last few quarters. This has helped in boosting the product pipeline.
In the last 10 years, Pfizer has increased dividends at a CAGR of 6.9%. Considering the acquisitions and drug pipeline, I expect further growth in dividends. Also, at current valuations, there is scope for robust capital gains.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.