Image source: Tax Credits via Flickr.
There are several great, investment-worthy companies out there, but some of those investments are predicated on what your personal situation is at the moment. If you are either in or approaching retirement, some great companies that are slam-dunk investments for younger investors might not be the best fit for you.
So, we asked three of our contributors to highlight an investment that may be a great opportunity for some, but may not be the best for those in retirement. Here's what they had to say.
Image source: TripAdvisor corporate website.
Andres Cardenal: TripAdvisor (TRIP 2.19%) is a great stock for long-term investors with above-average risk tolerance who are looking for disruptive growth opportunities. However, the company is also a relatively small business operating in a remarkably dynamic and always-changing environment, and investors in retirement would do better to focus on bigger corporations with more predictable prospects.
TripAdvisor is a leading player in online travel metasearch. The company allows consumers to search for hotel rooms and flights across multiple online travel agencies, and it aggregates results from different sources in a single list to make comparisons easier and more straightforward. The company is also expanding into instant bookings, allowing customers to make reservations directly via TripAdvisor as opposed to being sent to online travel agencies for their purchases, and this has major implications for investors.
If things work out as expected, venturing into instant bookings could mean increased profitability and superior growth prospects for investors in TripAdvisor over the years ahead. However, the company is also running the risk of alienating its main customers, online travel agencies, by stealing market share away from them, so TripAdvisor looks like an investment alternative offering both big upside potential and considerable risk.
Investors in retirement typically go for stable and predictable companies, preferably ones that pay consistent dividends over the years. TripAdvisor is an exciting investment alternative, but it's clearly not the best choice for retirees.
Image source: Kinder Morgan corporate website.
Tyler Crowe: Retirees are always looking for a stable income portfolio. Those quarterly dividend checks can go a long way in providing that extra boost to personal earnings without eating into the principal. However, a surefire way to ruin an income portfolio is trying to chase high-yield opportunities in a down market. If we needed a reminder of this, Kinder Morgan (KMI -0.32%) presents a great example.
For the past several years, the company was paying out a strong dividend that was growing at an astounding clip. The only issue was that to facilitate that growth, the company needed to invest billions in new assets and make some pretty big acquisitions. This led to the company taking on a pretty big debt load that, even by the oil & gas pipeline business, was pretty high. Once oil and gas prices started on their downward spiral, the realization set in that the company's cash-generating abilities were a little more sensitive to commodity prices than originally thought. This left the company with a bloated balance sheet and a set of assets that couldn't cover its expenses and its generous payout, culminating in the company slashing its dividend by 75%.
If we look across the energy space, there are a decent handful of companies that are in a very similar situation: Assets that are a little more sensitive to commodity prices and commodity volumes than originally thought, and a questionable amount of debt on the balance sheet. Two that really pop out in this regard are Williams Companies (WMB 0.31%) and Plains All American Pipeline (PAA 0.84%). Both companies have high debt loads, and credit ratings agencies have downgraded their credit ratings in the past couple months. Even though Williams and Plains sport dividend yields of 17.5% and 15.6%, respectively, right now, they are both probably headed for significant dividend cuts in the coming months, and it's probably better to avoid them until they get their financial houses in order.
Image source: Costco investor presentation.
Tim Green: For retirees, buying rock-solid, dependable companies is the name of the game. Warehouse club Costco (COST 1.01%) would seem to be a perfect choice, but quality isn't the only thing that matters. Valuation is important, and overpaying for quality can end badly, no matter how great the company happens to be.
I don't think there's any question that Costco is a great company. Revenue has nearly doubled since 2006 as the company has steadily expanded, and its profit margins have been extremely stable. Costco's advertising budget is essentially zero, as customers don't need to be convinced to pay for a membership, and employees are paid above-average wages, making customers love the company even more.
But the stock is expensive enough to warrant caution. With a market capitalization of about $66.3 billion and annual net income of $2.4 billion, Costco trades for nearly 28 times earnings. There's nothing wrong with paying a reasonable premium for a quality company, and at this price, Costco could still produce solid returns for investors in the long run. But the lower the price you pay, the lower the risk, and all the quality in the world doesn't change that fact. Costco is risky for retirees because its quality has pushed the stock price to optimistic levels, and anything short of the best-case scenario could lead to disappointing results.
