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Despite what you may have heard, stocks should still be a major part of your investment strategy, no matter how old you get. However, certain stocks work better in retirees’ portfolios than others. With that in mind, here are three of our contributors’ favorite stocks to own in retirement.
Predictable income and upside potential
Matt Frankel: Real estate investment trusts, or REITs, can be excellent stocks to own in retirement accounts. And, my hands-down favorite REIT is Realty Income (NYSE:O), which is actually a cornerstone of my own retirement portfolio.
Realty Income primarily invests in freestanding retail properties occupied by high-quality tenants with recession- and competition-resistant businesses. For example, service-based businesses like fitness centers and movie theaters are naturally immune to online competition, and non-discretionary businesses such as drugstores don’t suffer as much as other retailers during economic downturns.
In addition to the quality of its tenants, Realty Income uses long-term net leases, which hold tenants responsible for the variable expenses of property taxes, building insurance, and maintenance. All Realty Income has to do is find tenants and collect rent checks. And, the leases generally have annual increases built in — creating the closest thing to a consistent, rising worry-free income stream you can find.
To illustrate how successful this business model has been, consider that portfolio occupancy has never fallen below 96%, and the company has increased its dividend for 75 consecutive quarters. The company has produced a staggering 18.2% annualized total return since its 1994 IPO — and while the past doesn’t guarantee future results, there’s no reason to think Realty Income’s business model will be any less successful going forward.
An energy all-star
Brian Feroldi: In case you missed it, energy prices appeared to have bottomed earlier this year, and the sector has been slowly crawling back to life ever since. While it might still be to soon to sound the all-clear, I believe that right now is a great time to go bargain hunting in the industry.
One of my favorite energy stocks — Spectra Energy (NYSE:SE) — has rallied sharply from its January lows, and the share price is up more 50% year-to-date. But don’t let that strong jump fool you — there’s still plenty of value to be had by buying shares today, which is why I think this is a great stock for retirees to consider.
Spectra Energy operates one of largest natural gas pipeline networks in the country. What’s great about this company is that the vast majority of its revenue and profits are fee-based and protected by long-term contracts. That gives this company tremendous financial predictability, even when there are huge swings in energy prices.
To give you an idea of just how resilient this company’s business model is, Spectra Energy actually raised its dividend by 9% in January. At the time, energy markets were still in crisis mode, and oil was hovering near $30, so many of Spectra’s peers were in dividend-cutting mode.
Looking ahead, Spectra expects that its full-year dividend coverage ratio should come in at 1.2 times, which means that its yield should be easily sustained by the company’s profits. With shares currently yielding more than 5% and a huge backlog of projects set to come online over the next few years, investors should feel good about this company’s ability to continue to raise its payout annually.
If you are a retiree who is looking for income first and growth second, give Spectra Energy’s stock a closer look.
Own the backbone of our modern online lives
Chuck Saletta: To someone who has been investing since before the dot.com bubble imploded, networking giant Cisco Systems (NASDAQ:CSCO) may not seem like a first choice for an investment. Today’s Cisco, however, is a much better potential fit for a retiree’s portfolio than the Cisco of 1999 was.
For one thing, Cisco’s shares recently traded hands at less than 12 times its expected earnings over the next year. That’s a reasonable price to pay for a company expected to grow those earnings by 10% annualized over the next five years. While much of the world is already connected to the Internet, online traffic is expected to just about triple over the next five years, which means there will be a need for spending on infrastructure to handle that traffic
For another, Cisco’s strong balance sheet holds over $63 billion in short term, liquid assets like cash, cash equivalents, and short term investments, vs. only $56 billion in total liabilities. That will not only help it weather economic storms, but also give it incredible flexibility to invest in further building its business.
And finally, Cisco directly rewards its shareholders with a great dividend. Its shares yield around 3.6%, and its dividend has increased every year since it initiated the payment in 2011. And with a payout ratio of around 45% of earnings , it has room to continue increasing it.
With a strong balance sheet, great dividend, reasonable valuation, and a business that provides the backbone of our modern online lives, Cisco Systems deserves your consideration as a top potential stock for your retirement portfolio.
Brian Feroldi owns shares of Spectra Energy. Chuck Saletta owns shares of Cisco Systems. Matthew Frankel owns shares of Realty Income. The Motley Fool owns shares of and recommends Spectra Energy. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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