Building up a nest egg only to have it taxed into oblivion at retirement is a problem that a Roth IRA solves. Contributions aren't deductible, but that money grows tax-free, potentially for decades, and withdrawals after reaching the required age are free and clear of any taxes or penalties.
Both capital gains and dividends can accumulate tax-free in a Roth IRA, a fact that makes some stocks better than others. We asked three of our contributors to discuss a stock that would be a perfect fit for a Roth IRA due to their growth potential. Here's what they had to say.
Putting my mouth where my money is
Tyler Crowe: I guess there is no better way to suggest a company for a Roth IRA than to say that it is a holding in my own Roth IRA: Waste Management (NYSE:WM). What makes Waste Management a compelling stock to own in a Roth is two fold. The first is that it is a business that is likely to be around for a long time. The waste handling business is extremely difficult to disrupt because of the amount of capital needed to get a business large enough to compete. Then, there is the tricky regulatory and slightly political aspect that gives established business a big advantage -- think trying to get the permits for a new landfill. With that competitive advantage platform, Waste Management has built a business that generates high rates of return and uses those returns to reward shareholders.
So Waste Management's business certainly has the qualities you want for a long-term holding in a retirement account. The other reason this one is worth adding to a Roth IRA is you get to use the tax advantages of the account to benefit even more from the company's dividend. While the company's 2.6% dividend yield today won't wow anyone, the company has grown its payout at a decent clip of 6.5% annually over the past 12 years and has bought back 24% of all shares outstanding over that time frame. The efforts from the company to increase shareholder value through these means and the benefits of reinvested dividends in a tax advantaged account can do wonders for your retirement portfolio. That's why I own it in my Roth IRA, and why you should consider it as well.
Everyone should own at least one rare disease drugmaker
George Budwell: Novel drugs or therapies that target rare diseases are perhaps the most coveted types of assets within the high growth pharmaceutical industry. The basic issue at play is that so-called "orphan" drugs, or drugs indicated for diseases that afflict fewer than 200,000 people, come with a variety of benefits for their manufacturers, including premium prices, little to no push back from payers, extended periods of exclusivity, tax breaks, and arguably less competition, depending on the indication. Orphan drugs, on balance, also tend to require far less capital to bring to market, enabling their manufacturers to avoid taking on the unsightly amount of debt that frequently plagues small to mid-sized biopharmas.
With these advantages in mind, I think the mid-cap orphan drug specialist BioMarin (NASDAQ:BMRN) would be a great stock to sock away in a Roth IRA. BioMarin presently has five drugs on the market for orphan indications, such as the carbohydrate processing disorder Morquio A, as well as for Phenylketonuria, a condition characterized by a person's inability to break down the amino acid phenylalanine. BioMarin also sports an exciting clinical pipeline of high-value orphan drug candidates for conditions like short-limbed dwarfism and hemophilia A.
Aside from BioMarin's diverse product portfolio and clinical pipeline, the company is also set to post some of the highest levels of revenue growth within the pharmaceutical industry. Specifically, the drugmaker's top line is forecast to grow by over 26% this year, and by more than 18% in 2017. And if you throw in the fact that BioMarin has relatively little leverage on its balance sheet, with a modest debt to equity ratio of 34.9%, this stock looks, like a superb growth vehicle to hold for the long haul.
A bargain tech dividend stock
Tim Green: The ideal stock for a Roth IRA is one that pays a hearty dividend and has the potential to appreciate in value over the long run. Cisco Systems (NASDAQ:CSCO), the dominant leader in the networking hardware market, checks both boxes.
Cisco is undergoing a transformation, shifting away from being a seller of hardware and toward being a provider of solutions. Software and services will be the key to the company's growth going forward, with areas like security and collaboration offsetting slow growth in the switching and routing businesses. In fiscal year 2016, while the switching business was flat and the routing business suffered a small revenue decline, security and collaboration grew by 13% and 9%, respectively.
What makes Cisco stock enticing is a pessimistic valuation and a nice dividend. Analysts expect Cisco to produce adjusted EPS of $2.43 in fiscal year 2017, putting the forward P/E ratio at just 12.5. If you value the net cash on Cisco's balance sheet fully and back it out, that ratio drops to just 9.5. Add to that low valuation a dividend yield of 3.4%, and the result is a stock that deserves a place in your Roth IRA.
George Budwell has no position in any stocks mentioned. Timothy Green owns shares of Cisco Systems. Tyler Crowe owns shares of Waste Management. The Motley Fool owns shares of Waste Management. The Motley Fool recommends BioMarin Pharmaceutical and Cisco Systems. 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.