Vanguard 500 Index Investor (VFINX -1.44%), Vanguard Dividend Appreciation ETF (VIG -0.05%), and General Electric (GE 0.37%) all deserve a spot in your long-term retirement accounts, according to Motley Fool contributors. These three investments offer investors an intriguing opportunity to benefit from expanding global markets, and importantly, all three provide dividend payments that won't be taxed until they're withdrawn from accounts in retirement.
Index funds make strong 401(k) foundations
Keith Noonan (S&P 500): The best stocks for your 401(k) will vary depending on how your plan is structured, what funds and stocks it supports, and how much you have available to invest, but the Vanguard 500 Index represents one of the best all-around options for your retirement -- and one that has wide support from employer plans. It also has the endorsement of Warren Buffett, who has identified low-cost S&P 500 funds as his preferred investment vehicle and singled out VFINX for recommendation.
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While it might seem somewhat counterintuitive, actively managed funds that aim to beat the market have a poor track record of outperforming their benchmarks and typically carry high maintenance fees that eat into returns. Index funds, on the other hand, are built to match market returns, typically have lower expense ratios, and provide broad diversification that greatly reduces the risks associated with being too heavily invested in one company or industry.
As the name suggests, the Vanguard 500 Index tracks the S&P 500 index, which means that this fund will give investors a position in the largest publicly traded U.S. companies and exposure to a wide variety of sectors. It also packs a comparatively low expense ratio, with the annual management fee of 0.16% for Vanguard 500 investor class shares coming in 84% lower than the average fund with similar holdings.
Let those dividends appreciate over and over again
Brian Stoffel (Vanguard Dividend Appreciation ETF): Dividends aren't all that exciting over the short-run. But your 401(k) is not a short-term investment vehicle. It is designed to grow over as many as four decades. As such, it's important to visualize just how important dividends are.
To highlight my case, let's look at cigarette maker Altria (MO -0.38%). If we look at the company's stock performance over the past thirty years (blue line), it's nice, but not all that impressive. However, when we look at the total return (orange line) of a thirty-year investment in the company, it is jaw-dropping. The difference is explained solely by the reinvestment of dividends.
But I'm just using Altria as an example. Instead of putting too many of your eggs in one dividend stock, I think the Vanguard Dividend Appreciation ETF is a great optionhttps://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0920#tab=0 for your 401(k). The fees on this ETF are very low -- just 0.09% of your investment per year. And by investing in the fund, you'll have access to 186 stocks that share a key trait: they have a track record of raising their dividends every year.
The power of those dividend raises can produce a wealth-creating machine within your 401(k).
A corner stone stock for long-term portfolios
Todd Campbell (General Electric): While ETFs can be a great way to get exposure to a lot of stocks all at once, it can be a good idea to include individual stocks in long-haul portfolios like 401(k)'s too.
In constructing any well-balanced portfolio, it helps to begin with some core stocks with proven, been-there-done-that track records. In my view, General Electric is one of those corner stone type stocks.
The company is a global infrastructure and energy titan, and including it in portfolios provides instant exposure to both developed and emerging markets worldwide. Given expanding global populations and economies, that kind of exposure should reward General Electric investors plenty over the coming decades.
Owning General Electric stock may make sense in the short-term, too. America could be on the cusp of its biggest infrastructure and energy spending program since the 1950s, and you can bet that General Electric will capture its fair share of that spending.
Also, while General Electric is best known for being a leader in so called "old" economy solutions, like power and transportation equipment, it's carving out an important spot in the "new" economy too. The company's investing in new manufacturing processes like 3-D printing, and management thinks rising demand for its digital products and services can catapult sales for them from $5 billion in 2015 to $15 billion in 2020.
Overall, General Electric's got a lot of irons in the fire and the global scale to warrant a spot in portfolios, especially since shares yield 3.2%.
