The 1 Stock You've Been Overlooking for Your Roth IRA

You could be missing out on good income potential if you don't consider these three stocks for your Roth IRA.

Neha Chamaria
Neha Chamaria, Jordan Wathen, and Steve Symington
Jun 2, 2017 at 12:12PM

Unlike most retirement savings accounts, withdrawals from a Roth IRA are tax-free, which is why adding high-growth stocks to Roth IRAs is one of the best ways to build your retirement fund. No matter how high the stocks in your Roth IRA go, you don't have to worry about paying taxes on those gains later.

But how do you choose which stock is fit for your Roth IRA? While there are many good stocks to pick from, three great stocks suitable for Roth IRAs that are flying under the radar are TPG Specialty Lending (NYSE:TSLX), Retail Opportunity Investments Corp (NASDAQ:ROIC), and Stanley Black & Decker (NYSE:SWK).

A different way to play retail

Steve Symington (Retail Opportunity Investments): Considering the ongoing shift toward e-commerce, it might be tempting to avoid investing in companies that rely on the survival of brick-and-mortar retail. But that's not stopping Retail Opportunity Investments Corp. -- a real estate investment trust (REIT) that focuses on buying and revitalizing necessity-based (grocery-anchored) retail properties -- from consistently generating shareholder value. 

Man holding coins with a note saying retirement

Image source: Getty Images.

As of its first-quarter 2017 earnings in late April, for example, Retail Opportunity Investments had already completed nearly $125 million in shopping-center acquisitions in 2017. That brought its portfolio to 84 diversified shopping centers totaling roughly 9.7 million square feet, with each located in densely populated metropolitan areas along the West Coast. Retail Opportunity Investments has also demonstrated a knack for commanding higher rent from its tenants; same-space comparative base rent climbed 24% and 9.1% last quarter on new and renewed leases, respectively, all as the company extended its more than three-year streak of maintaining a portfolio lease rate of at least 97%.

Looking toward the bottom line, funds from operations (FFO) -- a metric that essentially measures its cash flow from operations -- have climbed nearly 30% over the same period. But it's worth noting that FFO per share declined 17% in that time thanks to dilutive stock offerings pursued to help finance ROIC's aggressive property acquisitions -- something with which patient investors shouldn't be overly concerned in these early stages. 

In the meantime, because Retail Opportunity Investments is a REIT, it must return at least 90% of its income to shareholders in the form of dividends. Keeping in mind its payout has more than tripled since its IPO in 2009, ROIC's dividend offers a healthy annual yield of 3.8% as of this writing. Assuming you have time to let those dividends compound (say, for example, in a Roth IRA) as Retail Opportunity Investments' growth story plays out, I think the stock is a compelling portfolio candidate.

Quietly profiting from retail failures

Jordan Wathen (TPG Specialty Lending): Pass-through entities like REITs and BDCs are perfect for IRAs, because you can collect big dividends without paying taxes on the distributions. In the BDC industry, few are better than TPG Specialty Lending at what they do, which is lending to and investing in mostly privately held businesses.

TPG Specialty Lending is a specialist in the world of private lending, having deployed nearly $180 million in loans to struggling retailers like Sears, Payless Shoes, and Toys R Us at yields of 8% or more. Its results in the industry have been exceptional. Historically, even when its borrowers have gone bankrupt, TPG Specialty has managed to collect its principal in full, thanks to smart underwriting that ensures there is ample collateral to recoup its investment.

Like many of its peers in the industry, TPG Specialty Lending trades at a premium as investors have been willing to pay up for yield. Shares aren't necessarily cheap, at about 1.3 times book value, but its 8.3% dividend yield is secure and its underwriting record is rock-solid. Keep this stock on your watchlist, and monitor it closely. If shares trade closer to book value -- about $16 per share -- this is one company worth buying and holding in a tax-advantaged account solely for its dependable yield.

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An incredible powerhouse dividend play

Neha Chamaria (Stanley Black & Decker): As reinvested dividends can give your income a nice boost, dividend stocks are a great fit for Roth IRAs. But while investors usually opt for high-yield stocks, what you need in a Roth IRA is a stock that pays reliable and growing dividends. One such stock is the industrial machinery manufacturer that is also a household name: Stanley Black & Decker.

machinery tools

Image source: Getty Images.

An incredible portfolio of brands and products that serve more industries than one can count has helped Stanley Black & Decker grow its earnings and free cash flows by double-digits in the past five years. But that doesn't give an iota of an idea about what a dividend powerhouse this stock is: Stanley Black & Decker has been paying a dividend for more than a century now, and it has increased it for 49 straight years.

There's a lot going on within the company in terms of expansion via acquisitions that should ensure growth in coming years. For retirees, owning a stock that not only is a leader in its industry and enjoys unparalleled brand power, but is also growing its earnings and dividends at a strong pace is, perhaps, one of the best moves toward creating a sound retirement plan.