Got a Roth IRA? Want some good investment ideas? We can help you with that!
You probably know that unlike a traditional IRA, where you'll have to pay taxes on your withdrawals, Roth IRAs grow truly tax-free -- because your up-front investments are made with after-tax money. In our eyes, that makes a Roth IRA a prime place to stash stocks that combine high dividend yields with some significant growth potential. Here are three stocks that our Foolish specialists like for new money in a Roth IRA right now: General Motors (NYSE:GM), Omega Healthcare Investors (NYSE:OHI), and Kimco Realty (NYSE:KIM).
Quietly, GM is leading the auto industry into a profitable future
John Rosevear (General Motors): For a future-minded investor, GM might seem like an ideal example of a stock to avoid, a company ripe for disruption. But look closer and you'll find that GM combines a great dividend, a strong balance sheet, a value price, and -- yes -- the very real potential for some significant bottom-line growth, thanks to its future-minded CEO and some very good home-grown technology. That checks all of our Roth IRA boxes, and then some.
The investment case for GM is (maybe surprisingly) quite strong. Consider:
- GM is making big money right now on strong sales of high-profit trucks and SUVs. And it's in the midst of rolling out a slew of new crossover SUVs that will ensure that big money keeps rolling in.
- GM's stock is cheap, at just 5.7 times its expected 2017 earnings.
- Because GM's stock is cheap, its dividend yield is a fat 4.4%. And take note: That's on a rock-solid payout that CFO Chuck Stevens expects to sustain through the next economic downturn.
- Speaking of downturns, GM is financially strong for the first time in many years. It has minimal debt, an investment-grade credit rating, and plenty of cash to ride out even a deep recession without having to cut future-product development (or that dividend).
- CEO Mary Barra has a comprehensive plan to boost GM's profits significantly over the next few years, mostly by taking better advantage of GM's massive global scale. (We know it's a good plan because it's already working!)
So why is GM's stock cheap? As with other big automakers, analysts are worried that the U.S. new-car market might be past its cyclical peak, which could put pressure on profits and margins for several quarters. They're also worried about "disruption" from new high-tech entrants that are seeking to change the way people get around.
The concern about the new-car market is real, but it's not something that should worry a long-term investor. As for disruption, it's a real worry for many automakers, but Barra has GM ahead of the game:
- Electric vehicles? GM was the first to ship an affordable long-range electric vehicle, the Chevrolet Bolt EV. Barra has hinted that several more are coming.
- Self-driving cars? GM will soon have almost 200 of them out testing on public roads, and its technology is thought to be among the best in the business.
- Mobility? GM owns 9% of Lyft, and has a seat on its board. It also owns 100% of Maven, a fast-growing urban car-sharing company.
Long story short: The auto business is set to change dramatically, and while all the so-called smart money is talking up Silicon Valley, Barra has quietly put this old Detroit dinosaur in the technology forefront. Some patience may be required, but if you reinvest the dividends and just let the story unfold, GM could give your Roth IRA a very nice boost over the next several years.
Financing facilities with rising demand
Cory Renauer (Omega Healthcare Investors Inc.): Since investors never need to pay taxes on dividend income generated by stocks in their Roth IRA, high-yield investments like real estate investment trusts (REITs) are a perfect fit. Over the long run, the savings really add up, especially if your dividend payments keep rising.
This April, Omega Healthcare Investors made its 19th consecutive quarterly payout bump. From October 2011 through the present, shareholders have seen their payments rise about 58% to $0.63 per share.
Best of all, this financier of skilled-nursing facilities is positioned to continue its impressive streak. Omega manages a portfolio of 985 facilities in the U.S. and the U.K., where older adults are the fastest-growing demographic. With years of increasing demand on the horizon, the third-party operators of these facilities shouldn't have too much trouble making their lease payments over the long run.
At recent prices, Omega Healthcare shares offer a huge 7.7% yield that you can reasonably expect to continue growing in the quarters ahead, based on first-quarter results. During the first quarter, Omega reported $0.773 per share in funds available for distribution. This informal measurement of cash flow the REIT can hand over to shareholders exceeds the latest dividend payment by about 23%, which suggests plenty of room for the 20th quarterly payout bump.
A case for physical retail in an increasingly digital world
Chuck Saletta (Kimco Realty): With the relentless rise of digital retail, companies operating in the realm of brick-and-mortar stores are being discarded like last month's leftovers. Yet not every company involved in physical retail is on the verge of collapse. A few, like real estate investment trust Kimco Realty, are actually showing some operational signs of strength, even as their shares get pummeled over the fears of a collapse in shopping.
Rather than focusing on the traditional megamall, Kimco specializes in smaller neighborhood and community shopping centers that frequently have reasonably strong tenants. No single tenant makes up more than 3.5% of its annualized base rental income. In addition, its top tenant list contains many strong discounters, grocery stores, and home improvement retailers that have shown themselves more resilient than general retailers have been to online competition.
Sure, there are a few duds among its customer list, such as struggling former retail titan Sears Holdings, but even that once-great retailer contributes only 0.9% of Kimco's base rental income. To top it off, with a solid occupancy rate above 95% overall (and above 97% for anchor tenants), the company certainly doesn't look like it's struggling to keep its retail space actively rented.
Investors able to stomach the roller coaster in its shares are currently rewarded with a dividend yield around 5.8%, and a dividend that has actually been increased recently. Better yet, Kimco's dividend is still comfortably covered by the company's funds from operations, indicating that the company is able to both reward shareholders and continue to reinvest in its operations.
Sure, there are risks involved in physical retail these days -- but not every owner of shopping space is the same. Kimco looks like it has a very real chance of surviving the upheaval in retail, thanks to its strong occupancy rate, diversified customer base, and covered and rising dividend. As the company's shares have been pummeled by the market's fear of physical retail, this high-yielding stock is an overlooked contender worthy of consideration for a Roth IRA.