If you don't have stocks in your retirement portfolio, you may not be ready to rule your retirement just yet. Safe-haven investments such as Treasury bonds and CDs may help you preserve capital, but you risk outliving your nest egg if it isn't growing. That's why owning high-quality stocks that have the potential to grow earnings and dividends for years to come are among the best possible investments for your golden years.
To help you start right away, we asked three of our contributors to suggest one stock each that they believe could help you fund your retirement. Read along to see which among PepsiCo (PEP 1.34%), 3M Co. (MMM 0.38%), and Kinder Morgan (KMI -0.11%) suits you best.
PepsiCo is a "set it and forget it" winner
Keith Noonan (PepsiCo): When it comes to selecting stocks for a retirement portfolio, equities that have low risk profiles and dependable dividends make strong candidates. To borrow an old infomercial catch phrase, a good retirement stock should allow you to "set it and forget it," and food and beverage giant PepsiCo fits that mold well.
Investing in solid stocks can help you retire smartly. Image source: Getty Images
Dividend stocks have historically outperformed the broader market, and dependable payouts can provide a source of income for retirees and a buffer against market volatility. Pepsi's payout is a respectable 2.8%, and the company has delivered dividend growth for 44 years running --- and will once again deliver an increase with its upcoming June disbursement. With positive momentum on cash generation and the annual cost of distributing its dividend representing roughly 57% of free cash flow, there's still room for payout increases down the line.
PepsiCo's business produces strong margins and is backed by a top-tier product portfolio, with 22 brands that generate at least $1 billion in annual retail sales and a lineup that's evolving to meet shifting market demands. No stock is without risks, and an increasingly health-conscious public does threaten sales of sodas and certain snack products, but the company is making commendable progress on diversifying its offerings through internal development and acquisitions.
With its stock trading at roughly 21 times forward earnings estimates, PepsiCo is a great company that pays a reliable dividend. It deserves a spot in your retirement portfolio.
You can't ignore 3M
Neha Chamaria (3M Co.): I too have a preference for low-risk dividend-paying stocks when it comes to retirement investing. It's even better if the company is a diversified one, as I believe diversity comes with the advantage of offering high growth potential while mitigating risks. So the stock I recommend is conglomerate 3M, a global company that sells products in roughly 200 countries today, has 100,000 patents under its belt, and serves nearly every sector you can think of, including industrials, consumer goods, healthcare, electronics, and energy.
I believe 3M's diversity has played, and will play, a key role in driving its earnings and cash flows higher over the years. 3M's profit has dipped during recessionary periods, but the broader trend has been upward:
MMM net income (TTM) data by YCharts
More importantly, 3M increased its dividends even during those hard-hitting years. In fact, it increased its payout for the 59th straight year earlier this month. Now that's the kind of income security you want in retirement. Better yet, with 3M paying out just about half its net profit and free cash flow in dividends, there's ample room for even higher dividends even if the company's earnings grow at a slower pace going forward.
Here's another interesting tidbit: 3M's dividend has nearly doubled in the past five years, and so has its stock price. Of course, there's no guarantee the stock and its dividends will continue to grow at such torrid pace, but there's no reason to doubt 3M's growth potential, either. When you factor in 3M's rock-solid financials, its return on assets, and management's credibility, it's hard not to pick the stock for your retirement portfolio.
The infrastructure giant awakens from its slumber
Chuck Saletta (Kinder Morgan): Pipeline giant Kinder Morgan saw its shares collapse following its dividend cut in late 2015. Yet it cut its dividend for precisely the right reasons -- to shore up its balance sheet and protect its credit rating from falling into junk-bond territory.
As painful as that step was for investors who came to expect or rely on Kinder Morgan's dividend, it's bringing the benefits the company hoped for. Its balance-sheet leverage is now safely in investment-grade territory and is expected to be around the company's target of 5.4 by the end of 2017. In addition to shoring up its balance sheet, the dividend cut helped Kinder Morgan finance more of its growth internally, setting it on a more sustainable and self-sufficient trajectory.
While there's no guarantee until the company announces a dividend increase, Kinder Morgan does anticipate being able to resume raising its dividend in 2018. Thanks to the tough medicine it took starting in late 2015, today's Kinder Morgan is on much more stable financial footing than it was then. Since the dividend cut caused its shares to sink, it stands to reason that resuming dividend increases in a more sustainable manner should help those shares on their road to recovery.
Humbled, stronger, and still generating billions in cash flow, Kinder Morgan looks poised to resume its traditional state of sharing the rewards of its growth with its shareholders through dividend increases. Combine that with a price that represents a reasonable market valuation after its tumble, and it becomes a reasonable candidate for investors looking for stocks to fund a portion of their retirement.
