Building a retirement portfolio that can stand the test of time and still produce a respectable return on investment isn't as easy as it may seem at first glance. The vast majority of investors, after all, would fare better by simply buying a low-cost index fund.
Even so, Johnson & Johnson (JNJ -0.69%), Consolidated Edison (ED 0.64%), and Dover Corporation (DOV -0.49%) are three stocks that have proven to be outstanding long-term buys, and often occupy a sizable portion of the portfolios of the smartest investors on the planet as a result. Below, our contributors discuss why elite investors favor these stocks as retirement vehicles.
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This healthcare stock is a proven commodity
George Budwell (Johnson & Johnson): Band-Aid and baby powder maker Johnson & Johnson is an exceptional stock to own as a retirement vehicle because it offers a nice mix of growing revenue, financial flexibility, and a rock-solid competitive moat in many areas of its overall business. Not to mention, it sports a decent dividend yield of 2.6% and 54 consecutive annual increases to its payout.
The net result is that J&J's shares have produced an absolutely outstanding total return on capital over the past three decades:
JNJ Total Return Price data by YCharts.
More important, though, J&J should continue its strong run for the foreseeable future, thanks to its heavy investment in research and development. In 2016, for example, the company spent over $9 billion on R&D, which is why J&J is the most innovative company operating in the diverse healthcare sector today. Backing this assertion, J&J brought a whopping 243 products to market in just the last year alone.
Now, the reason J&J's sky-high production rate is so critical is that pharmaceutical products have limited periods of time to maximize their commercial potential, meaning that it's vital to have a steady flow of new products coming to market.
For example, J&J's top-selling anti-inflammatory drug Remicade is currently facing copycat versions known as biosimilars in the U.S. and abroad, which could weigh heavily on its sales moving forward. However, the company's top-notch pharma pipeline not only should be able to offset any losses from Remicade's bout with biosimilars, but should keep the company's top line moving in the right direction.
The point is that J&J's growth is sustainable because of its particularly strong emphasis on R&D -- making it a great stock to own for long periods of time.
You can't go wrong with an essential service provider
Neha Chamaria (Consolidated Edison): When you're retired, established companies with strong track records of earnings and dividends make for ideal investments. I believe "defensive" stocks can prove particularly useful, as noncyclical businesses usually have stable earnings and returns -- something a retiree seeks. That explains why a utility stock like Consolidated Edison is popular among retirees.
Con Ed operates in a highly regulated environment, providing essentials like electricity and gas to millions of customers in New York City and Westchester County, New York, at decoupled rates. That means Con Ed not only enjoys inelastic demand for its products and services, but also sells them at prices aligned with its pre-established revenue targets. As that eliminates much of the volatility associated with top lines, Con Ed has been able to grow its profits and cash flows considerably in the past decade.
ED Net Income (TTM) data by YCharts.
You'd expect such stability in income to be richly rewarding for shareholders. Thankfully, Con Ed doesn't disappoint: It has increased its dividend for 43 consecutive years and currently yields 3.6%.
I like how Con Ed is now slowly yet gradually tapping non-utility income streams such as electricity and gas transmission, battery storage, and renewable energy like solar and wind. For example, just last month Con Ed filed a proposal for a battery storage trial project in partnership with NRG Energy to deploy batteries in parts of New York City this coming summer to ensure reliable power services. Management is clearly focused on future trends -- which should help Con Ed not only expand its customer base, but also diversify and strengthen its revenue streams in coming years.
All in all, I don't think you'd regret parking part of your retirement funds in a reliable, low-risk, dividend-paying stock like Con Ed today.
An invisible part of your everyday life
Chuck Saletta (Dover): Dover Corporation may not be the most visible part of your daily life, but rest assured, it likely plays a bigger part than you'd expect. When you fill up your gas tank, chances are that the pump itself came from one of Dover's fueling systems business lines. When you go to the grocery store, chances are that the refrigerated food cases come from Dover. And when you pop open a cold, frosty beer, there's a good chance that Dover played a role in its manufacturing process.
That it's so pervasive -- yet practically invisible -- in your everyday life makes Dover a smart company to consider for your retirement portfolio. What makes it really deserve your consideration, however, is the company's financial strength.
Dover's debt-to-equity ratio is below 1, and its current ratio is above 1. The modest debt-to-equity ratio suggests that while the company does use debt, it hasn't overleveraged itself, and the solid current ratio shows that it's not at near-term risk of a liquidity crunch. In addition, based on a discounted cash flow model, Dover looks fairly valued for its future prospects, making it financially worthwhile to own.
Capping off its financial strength is Dover's remarkable 61-year history of increasing its dividends. While its current yield around 2.2% isn't spectacularly high by today's standards, the company's clear commitment to increasing its dividend over time showcases its commitment to its shareholders. Although there are no guarantees until it actually announces an increase, its payout ratio of around 53% of earnings gives it room to continue that streak as its business grows over time.
