They say that there are only two certainties in life: death and taxes. While you can't cheat death and better not cheat on your taxes, you can at least avoid paying Uncle Sam taxes on any gains earned from investments held in a Roth IRA. That's why we think that the best stocks to own in a Roth are ones that will likely have generated substantial gains by the time you retire.
Reducing HR headaches and generating profits
Daniel Miller (Paycom Solutions): Roth IRAs have become wildly popular in recent years, and it's pretty easy to understand why. The big selling point for a Roth IRA is that money contributed can grow completely tax-free for life. That means investors should focus on companies that can grow and compound over decades; when you withdraw the money in retirement, you won't pay a dime on those earnings.
For that reason, if you have decades as your investing horizon, you should lean toward slightly more risky investments that could end up being big winners by retirement -- think small- and mid-cap stocks. One that's high on my list is Paycom Solutions.
Paycom Solutions is a leading provider of innovative, cloud-based, human capital management software that helps companies lower labor costs and drive employee engagement. The stock's been on fire, driven by both its top- and bottom-line gains:
Here's why you should like the stock long-term for a Roth IRA. First, the company has a strong competitive advantage since once HR departments use Paycom, it becomes time-consuming, difficult, and expensive to switch away from using its software products. That's driven its retention rate to a staggering 91%.
Another reason to buy into the stock is that CEO Chad Richison owns roughly 13% of shares outstanding, aligning his interests directly with individual investors. Paycom also boasts a strong balance sheet due to the software-as-a-service (SaaS) business model being cloud-based and thus capital-light. These factors make Paycom look intriguing to hold in a Roth IRA over the coming decades.
Sit back and collect a healthy income stream
Matt DiLallo (Medical Properties Trust): One of the many benefits of a Roth IRA is that investors never pay taxes on the gains, which include both capital gains and dividend income. The tax savings on dividend income can be substantial, especially for high-yield investments like real estate investment trusts. It's why REITs make great investments for a Roth IRA.
One of my favorite REITs is Medical Properties Trust. The company currently owns 247 hospitals across the U.S. and Europe that it leases to hospital operators. These companies run the hospitals and pay Medical Properties rent each month, which it returns to investors in the form of a very healthy 7.2% dividend yield.
While a yield that high is sometimes an ominous sign, that is not the case at Medical Properties Trust. The company spent much of the past year strengthening its balance sheet, and as a result, it has one of the lowest leverage ratios among healthcare REITs. It also pays out less than 80% of its cash flow via dividends, which provides a little extra cushion as well as some seed money to fund additional acquisitions.
Speaking of acquisitions, they are Medical Properties' primary growth driver. The company has grown its size at a 30% compound annual rate over the past five years by acquiring additional hospital properties, enabling it to increase the dividend by 15% since the start of 2014. With a largely untapped market in front of it, the company anticipates that it can invest between $500 million to $1 billion per year to acquire new properties, which should provide healthy dividend growth for years to come.
Focusing on this company's solid dividend
Brian Stoffel (Apple): I think putting solid dividend stocks in your Roth IRA makes a lot of sense. That's because price appreciation via quarterly payments is a pretty sure bet. And unlike a traditional IRA, you'll never have to pay taxes on any of that appreciation. I like to save my higher-risk, higher-reward investments for my traditional IRA.
That's why I would suggest investing your Roth money in Apple, which I'm betting will increase its dividend payments over the years.
While I'll admit that the company's moat is constricted by the fact that it needs to continue coming up with the Next Big Thing, this is a dividend stock that shouldn't be ignored. Currently yielding 1.8%, Apple only used 23% of its $54 billion in free cash flow over the past year. Not only that, but the company also has almost a quarter trillion in cash, in long and short-term investments.
While the days of heady growth may have passed, that cash will likely be returned to shareholders. There are lots of different ways this could happen. One could be a simple realization on the part of management that the company has tapped out most of its investable growth avenues. Already, this move is underway under CEO Tim Cook, as it previously didn't offer a dividend. The other is under even more aggressive share repurchases, which the company is already doing -- but could continue indefinitely. Furthermore, under the Trump administration, the company could be allowed to make a one-time transfer of overseas cash without a big tax impact and that would create a rather large one-time boon that could be paid out to shareholders.