With so much focus on saving in the years leading up to retirement, investors often ignore the question of what to do with their money once they actually get there. And even then, keeping your money in the stock market might seem like a risky proposition. But for those who know where to look, it certainly doesn't have to be.
To that end, we asked three top Motley Fool investors to pick stocks they believe are ideal for retirees who want to grow their nest egg. Read on to learn why they chose Visa (V -0.48%), Nucor (NUE -1.04%), and Celgene (CELG).
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Invest in a cashless world
Steve Symington (Visa): Considering more than 80% of the world's retail transactions are still made in cash or check, it's clear that Visa enjoys a long runway for growth. And if the payments technology specialist's latest quarterly results are any indication, it's making the most of that runway as we speak.
More specifically, Visa's revenue last quarter jumped 26% year over year (to $4.565 billion), while adjusted earnings per share rose 25% (to $0.86). The top line was helped by a whopping 38% increase in payments volume at constant currency to $1.9 trillion, as well as a 44% year-over-year increase in total processed transactions to 28.5 billion. This strength is the happy consequence, according to Visa CEO Alfred Kelly, of Visa's ongoing strategy "to pursue the conversion of cash and checks to electronic payments" and of "economic tailwinds in the U.S. and globally."
All the while, Visa not only pays a modest dividend that yields around 0.65% annually as of this writing, but also has $5.5 billion in funds remaining under its existing share repurchase authorization.
With Visa shares currently trading at a reasonable 25 times this year's expected earnings, I think the stock is a perfect portfolio candidate for retirees looking for an attractive mix of potential share price appreciation, capital returns, and relative stability.
Build your nest egg out of steel
Rich Smith (Nucor): What's the best way for retirees to grow their nest egg? The Wall Street Journal recommends a "total-return strategy," saying it's a "simple and dependable" way to invest "safer." But what is a total return strategy anyway, and what's a good stock to suit it?
Total return is actually something we've been recommending here at the Fool for years -- and it really is as simple as the Journal makes it sound. Basically, you look for stocks that sell for a P/E ratio lower than the sum of their projected earnings growth rate and their dividend yield. Simple as that.
Nucor (NUE -1.04%) stock is a good example. According to data from Yahoo! Finance, this leading steelmaker currently costs 17.3 times its trailing-12-month earnings -- i.e., it has a 16.8 P/E. To make it a viable total return pick, a retiree would want to see Nucor growing and paying dividends at a percentage rate of 16.8% or better annually. So does it?
It does. Analysts who follow the stock project that Nucor will grow its profits at about 23.9% annually over the next five years. On top of that, Nucor pays a 2.7% dividend yield, which is 29% better than the average yield on the S&P 500. Combined, that works out to Nucor growing profits and paying dividends -- your "total return" on the stock as a part-owner -- at a rate of 26.5% annually over the next five years.
This gives Nucor stock a 0.63 total return ratio (17.3 divided by 26.5), which is well below the 1.0 target for a total return investor. It means Nucor has a big margin of safety in case growth doesn't pan out as expected -- and a lot of room to grow your nest egg if it does.
Dozens of well-placed bets
Cory Renauer (Celgene Corporation): Normally, I would tell retirees looking for growth to avoid biotech stocks, but this pick is a rare exception because it follows the golden rule for continued success in this industry: You're more likely to succeed if you look for the next billion-dollar drugs outside of your own laboratory. This is simply because it's hard to pull the plug on a program while there's still a glimmer of hope and plenty of cash to keep it on life support.
Biotech start-ups, on the other hand, must be cruel when choosing which new drug candidates get to move forward. Over the years, Celgene has used the massive cash flows its own drugs generate to acquire its picks of the litter outright or at least provide a helping hand in return for a piece of the action if candidates succeed. For example, Celgene acquired ozanimod for $7.2 billion a couple years ago. This May, the company reported late-stage clinical trial results that showed the easy-to-swallow pill prevented multiple sclerosis from relapsing better than a popular injected therapy. If an application heading to the Food and Drug Administration later this year earns a widely expected approval, the drug could generate more than $4 billion in sales each year at its peak.
Hardly a month goes by that Celgene doesn't announce a new collaboration agreement like one that recently bore fruit. In 2010, the company handed Agios Pharmaceuticals $130 million up front, plus additional payments triggered at predetermined milestones, for rights to a handful of candidates, one of which earned FDA approval earlier this month. Idhifa is the first oral-targeted therapy for a small group of patients with a difficult-to-treat form of leukemia that could generate over $1 billion in peak annual sales.
Although Celgene's own drugs are getting it done in the present, its best days are still to come. With dozens of well-placed bets across the biotech industry, this is one growth stock retirees can reasonably expect to fuel their nest egg's growth in the years ahead.
