Two Undervalued High-Yield Dividend Stocks for Retirement Income and Growth

For retirees seeking a blend of income, inflation protection, and long-term growth, the market offers two compelling candidates: AES Corporation (AES) and Devon Energy (DVN). Both stocks trade at significant discounts to their intrinsic value, offer robust dividend yields, and are backed by analyst price targets suggesting 40%+ upside potential. While their industries—renewables and energy—differ, they share a common thread: underappreciated fundamentals that position them to outperform in a shifting economic landscape.

AES: A Renewable Energy Powerhouse with a Dividend Legacy

AES, a global leader in clean energy, has long been a favorite among income-focused investors. Its forward dividend yield of 5.68% [1] is among the highest in the S&P 500, supported by a 12-year streak of dividend increases and a payout ratio of just 47.5% [1], ensuring sustainability. The company’s pivot to renewables has accelerated in 2025, with Adjusted EBITDA rising to $681 million in Q2 2025, driven by its Renewables SBU [1].

AES’s growth story is anchored in its 12 GW power purchase agreement (PPA) backlog, including 5.2 GW under construction and 1.6 GW of new solar and wind contracts signed with data centers [1]. These long-term contracts provide stable cash flows, critical for sustaining dividends. However, AES’s balance sheet remains a concern: a debt-to-equity ratio of 8.99 [4] and an interest coverage ratio of 1.6x [1] highlight its leverage. Yet, its aggressive renewable expansion—targeting 3.2 GW of new capacity by year-end 2025—suggests a path to deleveraging through growth. Analysts project a 47% upside to $34.50 [1], reflecting confidence in its transition to a low-carbon future.

Devon Energy: A High-Yield Energy Play with Inflation Hedges

Devon Energy, a major U.S. oil and gas producer, offers a 4.13% forward yield [1] with a unique structure: a fixed component and a variable portion tied to excess free cash flow. This means higher oil prices could boost its dividend, making it an attractive hedge against inflation. With $8.9 billion in total debt and a debt-to-equity ratio of 58.1% [1], Devon’s leverage is substantial but improving. Its 9.8x interest coverage ratio [1] and $1.7 billion in cash [1] underscore its ability to service debt while rewarding shareholders.

Analysts are bullish on Devon’s 2025 prospects. Earnings per share are forecast to rise to $3.69 in FY2025 and $4.19 in FY2026 [1], driven by disciplined capital allocation and a focus on high-margin U.S. shale. A 42% upside potential to $44.15 [1] reflects optimism about its ability to capitalize on energy demand and optimize costs. For retirees, Devon’s dual role as an income generator and inflation buffer—via exposure to commodity prices—makes it a strategic addition to a diversified portfolio.

Balancing Risks and Rewards

Both stocks carry risks. AES’s debt load and exposure to renewable project execution risks could pressure its credit profile, while Devon’s variable dividend structure and energy sector volatility pose challenges. However, their undervaluation—AES at a P/E of 9.47 and Devon at 8.06 [1]—suggests the market has not fully priced in their growth potential.

For retirees, the key is diversification. AES offers a stable, inflation-adjusted income stream through renewables, while Devon provides a high-yield energy play with upside from commodity cycles. Together, they form a complementary pair, balancing long-term sustainability with cyclical resilience.

Source:

[1] 3 High-Yield Dividend Stocks Wall Street Thinks Will Soar 41% or More in 2025 [https://www.fool.com/investing/2025/01/12/3-high-yield-dividend-stocks-wall-street-thinks-wi/]
[2] AES (AES) Balance Sheet & Financial Health Metrics [https://simplywall.st/stocks/us/utilities/nyse-aes/aes/health]
[3] Brokers Set Expectations for Devon Energy Q3 Earnings [https://www.marketbeat.com/instant-alerts/william-blair-estimates-devon-energy-q3-earnings-2025-08-27/]
[4] AES (The AES) Debt-to-Equity : 8.99 (As of Jun. 2025) [https://www.gurufocus.com/term/deb2equity/AES]