Investing for your future is important regardless of your age, but you could certainly argue that investing is especially important for baby boomers, quite a few of whom find themselves behind the eight ball when it comes to saving for retirement.
Even though baby boomers have lost valuable time with which to compound and grow their nest eggs, most people in their 50s still have two, three, or four more decades of life ahead of them. This means they need to continue investing to stretch that nest egg for as long as possible.
I know some boomers are still very leery of the stock market, especially with the broad-based S&P 500 nosediving 50% on two separate occasions over the past 15 years. However, even after 35 stock market corrections of at least 10% over the past 66 years, the S&P 500 continues to head higher. Sometimes it takes, weeks, months, or years, but the broad market indexes always shake off retracements to hit new highs -- and that's great news for the long-term investor.
Three perfect stocks for baby boomers
So what does the perfect stock for a baby boomer in their 50s look like? Ideally, it's a company that's paying a dividend, which could grow into a larger dividend over time. But it's also a company that offers better growth prospects than what someone in their 60s or 70s might be looking to buy. Here are three examples of perfect stocks baby boomers should consider buying.
The first company worthy of consideration is payment processing giant MasterCard (NYSE:MA). MasterCard offers baby boomers a multi-decade opportunity to cash in on high-single-digit-to-low-double-digit growth.
The key to MasterCard's growth plan is a mix of untapped opportunity and high barrier to entry. According to MasterCard's CEO, Ajay Banga, 85% of the world's transactions are still being conducted in cash. This presents MasterCard with a massive opportunity to grow its credit and prepaid businesses in regions like Africa, Southeast Asia, and the Middle East over the coming decades. Best of all, because it takes a lot of capital and time to lay the groundwork for the merchant processing infrastructure, MasterCard has but a small handful of competitors. This allows for fairly predictable cash flow and generally strong pricing power.
Another inherent advantage for MasterCard is that it solely deals with the payment processing side of the equation. A few of its peers, such as Discover Financial and American Express, also lend directly to consumers. While this means the ability to compound their profits when the economy is expanding by double-dipping on merchant fees and interest on what they've lent, it also means exposure to potential loan delinquencies during recessions or slowdowns. As a processor only, MasterCard doesn't have these concerns, and thus faces minimal exposure to the U.S., or even global, economy.
Currently, MasterCard is only paying out a 0.8% yield, but it could easily turn into a dividend juggernaut over the next decade. It has nearly $2.9 billion in net cash, has generated $4.1 billion in operating cash flow over the trailing 12 months, and is paying out just 21% of its expected EPS in 2016 in the form of a dividend. I'd opine that this stock has "baby boomer investment" written all over it.
Healthcare can be a bit trickier, because it's tough to find a company that still offers growth, but which also pays a dividend. I believe Gilead Sciences (NASDAQ:GILD) is the answer. What Gilead offers baby boomers is predicable cash flow, a growing dividend, and the opportunity for big pipeline advancement.
Gilead's steady cash comes from its dominant line of hepatitis C products, led by Harvoni, and its next-generation HIV therapies. Currently, Gilead commands about 90% of the HCV market share in the lucrative U.S. market, all thanks to its once-daily pills Harvoni and Sovaldi. It's been tough for competitors to unseat Gilead, even with the use of price discounting, because Gilead's therapies are convenient and effective. Getting patients and physicians to choose another drug would take a big leap forward in terms of short treatment timeframes or efficacy, and I simply don't see that happening anytime soon. For the time being, Gilead is generating $15 billion to $20 billion a year in free cash flow.
On the flipside, this FCF presents Gilead with ample opportunities to go shopping. It was Gilead's $11 billion purchase of Pharmasset in 2011 that landed it sofosbuvir (which is now known as Sovaldi). Within its pipeline, Gilead already has compounds directed at hepatitis B and nonalcoholic steatohepatitis, and it very easily could gobble up peers working within these indications, or perhaps even oncology, where it has research ongoing, to boost its long-term growth prospects.
In February, Gilead announced a fresh $12 billion share buyback, and also raised its dividend by 9% to $0.47 per quarter. This new payout works out to a pretty nice 2.2% yield, and it has plenty of room to grow considering Gilead's cash flow.
Finally, baby boomers would be wise to pay attention to the addiction trends of millennials and consider adding coffee giant Starbucks (NASDAQ:SBUX) to their retirement portfolios.
Starbucks has a number of factors working in its favor, but arguably at the top of that list is its branding power. In 2015, based on rankings from Interbrand, Starbucks was the 67th-most valuable brand in the world -- and this figure is likely only going to grow over time. Within the U.S., Starbucks has an almost cult-like following of loyal customers; some are influenced by its loyalty program, while others are simply addicted to the coffee and culture that Starbucks presents. Whatever it is that brings Americans in for their drink of choice, Starbucks mastered this formula a long time ago.
Overseas expansion is an area where Starbucks could really grind out some growth. Based on recent comments from CEO Howard Schultz to CNBC, China could one day surpass the U.S. as Starbucks' biggest market. At the moment, China has more than 2,100 Starbucks locations, and the company plans to add roughly 500 locations per year over the next five years. Remember, even though China's growth rate has slowed, it's still impressive at 6%, and represents a great opportunity for Starbucks to take advantage of China's growing middle-class, which is looking for simple luxuries.
Starbucks isn't cheap by typical fundamental metrics, but its pricing power (derived from its brand strength), coupled with its expansion opportunity, make its long-term potential quite palatable. Its current yield of 1.5% may not make you drool with excitement, but it should have plenty of opportunity to grow into a superior income stock in the coming decade.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of and recommends Gilead Sciences, MasterCard, and Starbucks. it also recommends American Express. 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.