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Roundtable: Can You Retire on These Stocks?

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The financial crisis did major damage to retirement nest eggs. Especially for those in or close to retirement, the hit they took was massive. The market recovery over the past two years has done a lot to repair that damage, but retirees and near-retirees still have to make sure they own the best investments they can find.

To help give you ideas on stocks to buy and others to avoid, we asked some of our Motley Fool analysts to weigh in with their opinions about their favorite stocks for conservative investors, as well as stocks they think are flashing warning signs right now. Read on to see their ideas.

Travis Hoium, Motley Fool contributor
When looking at stocks for retirement, I like to see three qualities: The stock must be a good value, it should pay a dividend, and the company has to make something I can touch and feel. Tangible products mean capital investment and research and development, which reduce the risk that someone in a dorm room can blow up your business model (like Google and Facebook did).

Intel (Nasdaq: INTC  ) is a stock I would sleep well owning in retirement. The stock trades at less than 11 times earnings and pays a 3.2% dividend yield, and Intel is a market leader in the high-tech chip space. As a bonus, the company has almost $12 billion of cash and short-term securities versus only $2 billion in debt, and it grew revenue by more than 20% over the past year. Who would have thought a decade ago that you could own a tech stock so cheaply?

But what stock should you avoid heading into retirement? I would avoid Post-It Note maker 3M (NYSE: MMM  ) for a variety of reasons. The company pays a dividend and makes thousands of tangible products, but as I highlighted a few weeks ago, the magic seems to be gone at the company. 3M isn't as attractive as Intel, with a dividend yield of 2.3% and a P/E ratio of 16.7, especially when you consider that 3M has grown more slowly. As I see it, there are far better deals out there than 3M, and Intel is one of them.

Chuck Saletta, Motley Fool contributor
Retirement is a time when investors' priorities turn to generating current income and inflation protection from their portfolios. It stands to reason that the ideal type of stock for them to own is one that has:

  • A decent dividend yield, providing current income.
  • Regularly raised that payment, providing a measure of inflation protection.
  • A reason to believe that behavior will continue.

Energy pipeline giant Kinder Morgan Energy Partners (NYSE: KMP  ) certainly fits the bill. With a 6.2% yield, it pays much better than the general market. With a 15-year history of regularly raising that payment, it has a well-established track record of increasing its owners' rewards. And with the potential for increased export traffic through its pipelines, that trend looks as though it's capable of continuing.

That said, not all high-yielding stocks belong in a retiree's portfolio, especially if that retiree needs every dime of income to cover his or her costs of living. For instance, mortgage REIT Annaly Capital (NYSE: NLY  ) sports a very tempting 14% yield, but that dividend has whipped around, both up and down, over the past several years. I'm comfortable having the stock in my portfolio, but I have years to go before I plan to tap my retirement nest egg. That erratic payment stream makes it a tough stock for someone who depends on spending dividends.

Sean Williams, Motley Fool contributor
Those nearing retirement shouldn't have to spend their golden years wondering whether their portfolio is going to send them to the poor house. Investing for retirement means finding conservative investments that can weather any economic environment -- essentially, the set-it-and-forget-it approach.

One name that immediately comes to mind is Johnson & Johnson (NYSE: JNJ  ) . J&J has a growing base of potential customers, with baby boomers getting older and the world’s population rapidly increasing. J&J's three business segments -- medical devices and diagnostics, pharmaceuticals, and consumer products -- give you diversified exposure to the health-care sector, meaning J&J won't be hurting for future business and shareholders won't be hurting for dividend income. With 49 consecutive years of dividend increases under its belt and a top credit rating of AAA, investors can sleep well at night owning a company like this.

On the other hand, I'm not as comfortable with U.S. tobacco giant Altria Group (NYSE: MO  ) , which many retirees include in their portfolios. While its 5.6% dividend yield is enough to attract some of the most conservative investors, I think the company's stock should come with a similar warning label to what Congress has mandated must go on cigarette packages by next year. Doing business solely within the U.S., Altria is extremely susceptible to the United States' increasingly tougher anti-smoking regulations. Bearing one of the largest debt burdens in the tobacco sector and facing the prospect of more legal action against the company in the future, it could be a stalwart name to avoid.

Learn more
Find some other ideas for retirement-worthy stocks in the Fool's special free report, "5 Stocks The Motley Fool Owns -- And You Should Too." Get instant access.

Fool contributor Dan Caplinger compiled this roundtable, and he doesn't own shares of any of the stocks or ETFs mentioned. Chuck owns shares of Annaly Capital Management and of Kinder Morgan Management, a related company to Kinder Morgan Energy Partners. The Motley Fool owns shares of Annaly Capital Management, Altria Group, Intel, and Johnson & Johnson and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, Johnson & Johnson, and 3M and creating a diagonal call positions on Intel and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you feel like a knight at King Arthur's roundtable.

Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2011, at 7:04 PM, sanemann wrote:

    ...I can't agree with the recommended stocks for a retirement portfolio generating an income. The stocks recommended are too expensive with too low a yield to be considered a substantial income generator. Unless you have a cool million to invest, I don’t! I'm relying on REITs to provide the income I need to survive. Keeping a close watch on these stocks are absolutely necessary, but if your investment is under 200K what can you do??? The article is geared toward someone who has much more money than that to invest...

  • Report this Comment On July 13, 2011, at 8:18 PM, jclaytonjr wrote:

    For income and diversification, how about a retirement portfolio which has the following in its equity allocation:

    General U.S. Equity - VIG for low cost and broad exposure to dividend increasing companies. Also, for additional income, perhaps UTG, a leveraged closed end fund holding mostly utilities, with a 5.8% yield. For small cap exposure, with a yield, I suggest RVT. It pays a managed distribution of 5%, is modestly leveraged, and has an excellent long term track record. Its sister funds, RMT (microcaps) and FUND (more mid-cap oriented), are also reasonable choices.

    International Equity - any of the Wisdom Tree dividend oriented ETFs (e.g. DEM, DGS) depending on your preference for developed or developing markets, large cap, small cap, etc.

    An MLP ETF or MLP closed end fund. I like KMF, which sells at a 7% discount from NAV at the moment, holds mid-stream MLPs such as Kinder Morgan, and yields 6.5%. For more direct energy exposure, sister fund KYE might do the trick.

    A closed end REIT fund, such as RQI or RIT, both of which sell at a discount and yield around 7%. They are somewhat leveraged. If you don't want the leverage, consider VNQ, Vanguard's low cost REIT ETF.

    Such an approach avoids the risk of individual securities, creates broad diversification, and provides a nice income stream off of an equity portfolio. Of course, for retirement, you will also want some allocation to fixed income, keeping to relatively short maturities right now.

    I own VIG, UTG, RVT, KMF, RQI, RIT, DEM.

  • Report this Comment On July 14, 2011, at 12:53 AM, mansourg54 wrote:

    Altria is the stock for retirement, for incomeand slow appreciation. It is not affected by interest rate fluctuations. It has been paying and increaising the dividends for the past 48 years. For the past 14 years it has been paying the states 3.4B in the Master Settlement Agreement in addition to paying dividends to its shareholders. The payment to the states will end 2020. MO owns 28.4% of SabMiller beer and if it sells it can pay of all its long and short term debts. I own close to 100000 shares in MO. I bought MO shares in 1997 when the lawsuits started and the share price plummeted and received KFT and PM shares which I sold and bought more of MO.

    10 years ago RAI sold its international business to Japan tobacco and concentrated on the US market apparently because of higher profit. MO did the same in 2007 and 2008.


  • Report this Comment On July 14, 2011, at 9:52 AM, pete1on1 wrote:

    I have to disagree with Chuck Saletta on Annaly Capital (NLY). Annaly has paid a quarterly dividend since Q4 2007 with an average yield of 12% with the lowest yield at 3.6% for the first quarter 2006.

  • Report this Comment On July 15, 2011, at 2:58 PM, dallis1948 wrote:

    Good, thought-provoking article as evidenced by the many comments. I KNOW VERY LITTLE ABOUT STOCKS having started investing individually in May, 2008. Anything sound funny about that time period? Oh well, I moved money out of my 401k, which was bleeding, and started buying shares. Over the next year, I lost 22% of my wealth (that beat the S&P folks). I was not afraid to continue investing in April, 2009. Because of that one fact, I was able to buy some strong companies, cash-rich, dominant in their markets, paying huge dividends that mostly were never cut over groups of years.

    I did buy MO, RAI, KFT, VOD, KMB even some KMP all with yeilds in the 5% - 11% range. I added some utilities, healthcare, and energy stocks to round out that part of my portfolio. Today those stocks are averaging 6.47% dividends and are up more than 37% over what I started with in May, 2008.

    That just goes to show that you don't have to be a genius to do all right with stocks. They say Warren Buffet says to buy only what you know. Well, I didn't know about MLPs (Kinder-Morgan), so I bought 20 shares (within my IRA, a no-no) just to watch and see how it operated. MLPs require a K-1 tax form which your accountant may charge you dearly to complete. That cost may eat up your earnings. Discuss this with your accountant before you invest directly in MLPs. Funds holding MLPs charge fees and give you capital gains. REITs on the otherhand don't require form K-1s. They may pay high dividends because they pay out 90% of earnings each year. However, they may issue new shares (read about NLY) for new investments and that will affect future dividend rates positively or negatively. You need to keep an eye on them both for price changes and dividend changes, but hey NLY is paying me 14.8%. I'll do a little watching.

    You seem down on MO. It is a "sin stock", no doubt. It may not have a foreign market, but if that bothers you, add some PM ( it offers one of those 3% dividends you seem to recommend).

    JNJ is a nice big animal. It's dividend is currently 3.4% after paying dividends for 49 years. What kind of dividend growth is that?

    You mentioned INTC, now paying 3.3% dividend on a price of $22.41. Intel needs to figure out its roll in the tablet computer rage. Until then it will still be mentioned with Microsoft as "Micro-Tel". Both have been big names, but what is their roll in the future and look at those meager dividends.

    As one of those 3 decades of folks roughly referred to as Baby-Boomers, I am looking to my meager savings to supplement my FUTURE income. Consistently, advisors seem to agree that one should not withdraw more than 4% of their savings to supplement earnings. Well, if you buy gobs of stocks paying 3% dividends in an economy of extremely slow growth, you won't have enough earnings to afford that 4% withdrawal rate. Don't tell me those dividends will grow, look at your example of JNJ paying 3.4% after 49 years. Only a few of us will live long enough to enjoy a 4% dividend from JNJ.

    As far as the idea jclaytonjr proposes of investing in fund companies, I can't see paying someone else to go fishing with my money. They eat whether they perform or not. Me, I'd only eat if they put my hooks in the waters where the fish were. No I think I'll just keep my eyes on my stocks, watching for the effects of a changing economy on my investments and making changes as needed to keep my dividends higher than my future withdrawals. If I stop catching fish, I'll move my hooks elsewhere. So far, I'm catching more fish than the money managers who eat in fancy restaurants off the money they take from their "clients".

    I like DUK, KFT, KMB, MO, RAI, VOD, VZ, T, WIN, XOM, AEP,EXC, HCN, LEG, LLY, LTC, NGG, NLY, PGN, RDS.A. I'm considering TOT, STD, AZN, CALM, etc. I'd like to read your comments on any of these.

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