If You're In Your 40s, Consider Buying These 3 Stocks

Image source: Getty Images.

Hopefully by the time you reach 40-years old you've started building up your nest egg. But even if you haven't, panic won't solve anything. In fact, you've got over two decades to let your money start working for you.

To bridge the gap between where you are and where you want your savings to be, focus on buying stocks with three key traits:

1. Wide moats
2. Solid revenue growth
3. Enough cash flow to start paying a meaningful dividend

I believe that if you buy shares of search giant Alphabet (GOOG 1.43%) (GOOGL 1.42%), robotic surgical maker Intuitive Surgical (ISRG 0.71%), or pharma-focused cloud player Veeva Systems (VEEV 0.34%), you'll be getting all three. And chances are good that by the time you hit the retirement button, all three will be dividend payers as well.

What the heck is a "wide moat"?

A "wide moat" is simply another name for a sustainable competitive advantage. In capitalism, every company is trying to come out with a better product than its competitors. That's great for consumers, but can make life tough for companies. The ones that survive are the ones that have the types of advantages which last years upon years.

Alphabet -- formerly known as Google -- has the widest moat of these three. The company's search engine has a dominant global market share -- 71% of desktop and 92%  of mobile, according to NetMarketShare. It has seven products with over one billion users: search, Maps, Gmail, Android, Chrome, YouTube, and Google Play.

Intuitive Surgical has been the only major player in robotic surgery for years. With competition now entering the fray, they will have to deal with a substantial lead build by the daVinci machine's first-mover status. As of last quarter, there were over 3,700 in the company's installed base of machines, with millions of hours of doctor practice logged.

Veeva is a system developed to meet the cloud needs of the pharmaceutical industry specifically. While still relatively young, the company has been winning over Top 20 global pharma companies at an impressive clip. Once a company has all of its data -- sales, regulatory, and clinical trials -- stored in Veeva's system, the switching costs for moving to a new provider become very high. This presents a formidable challenge to competitors.

But how fast are they growing?

To get an idea for the kind of growth these three companies are experiencing, let's look at both sales and earnings growth starting in 2012.

Data source: SEC filings.

A few caveats are in order. First, Alphabet is one of the most valuable companies in the world -- pulling in well over $70 billion per year in revenue. Intuitive and Veeva are much smaller, which allows their growth rates to come in at higher clips.

Second, as you can see, Intuitive suffered a major slowdown in 2013 and 2014. This was primarily as a result of the onset of the Affordable Care Act. Since hospitals have adjusted to the changes and are once again opening their purse strings growth has recovered nicely.

No matter how you spin it, all three of these companies are growing revenue nicely, relative to their size.

Room for a dividend?

It's no secret that retirees love their dividends. That's because the quarterly payments (1) help provide income, and (2) can be reinvested to provide the magic of compounding in one's nest egg. Though none of these three currently offers a dividend, they all have the potential to do so.

To see what I mean, let's examine some pre-requisites for becoming a dividend payer.

Data source: Yahoo! Finance.

Relative to their sizes, all three of these companies have excellent balance sheets, and healthy free cash flows. I don't expect any of them to start paying a dividend tomorrow -- they are all reinvesting in their businesses.

But that doesn't mean a dividend-paying day won't come. To get an idea for the type of yield we'd be looking at, it would be helpful to see what the dividend would be if each company used 60% of its current FCF on dividend payments.

If that were the case, Alphabet (Class C), Intuitive, and Veeva would be yielding 1.7%, 1.9%, and 2%, respectively. None of those is worth writing home about -- but if these businesses continue to win over customers, that could just be the beginning.

At the end of the day, buying these three stocks would be a good move with or without a dividend -- a payout down the road would just be icing on your nest-egg cake.