Preparing your portfolio for retirement is no easy task, but investing in quality dividend-paying stocks can certainly relieve a lot of the hassle. Income plus appreciation is a powerful combination to build your nest egg.
We asked three Motley Fool investors to identify one stock they thought would supercharge a retirement portfolio. There are some very good reasons why they chose Pfizer (NYSE:PFE), Cisco Systems (NASDAQ:CSCO), and Diageo (NYSE:DEO).
A solid dividend-paying drugmaker
Keith Speights (Pfizer): One longtime favorite for retirement portfolios is Pfizer. It's currently the largest drugmaker in the world in terms of prescription-drug sales and appears likely to remain near the top for years to come. The company began operating way back in 1849, so Pfizer definitely has staying power.
For retirees, though, the best thing to like about Pfizer is its dividend. The company's dividend currently yields 3.83% -- among the highest in the healthcare industry. Although Pfizer is spending a little more to fund the dividend program than it's earning right now, there's no reason for concern. The company's cash flow remains rock solid, and Pfizer's earnings should pick up over the next few years.
Pfizer does face some headwinds, as several drugs have either already lost patent exclusivity, or will soon do so. In addition, sales are declining somewhat for two of its top products -- autoimmune disease drug Enbrel and vaccine Prevnar 13. On the other hand, the big pharma company also has some stars in its lineup, especially cancer drug Ibrance.
Over the long run, Pfizer's commitment to internal research and development and its continual search for good acquisition opportunities should keep the company on a solid growth path. That means the dividends should keep on flowing -- exactly what retirees like to hear.
A dependable tech giant
Keith Noonan (Cisco Systems): Cisco is a company that's going through a transitional period, and there might be concern that the company isn't a dependable investment for your non-working years. However, its low valuation, attractive returned-income profile, and overall business strengths suggest that it's a great stock for building a retirement nest egg.
Cisco has long been a stalwart of the networking industry, and has relied on sales of switch and router hardware -- devices that are used for creating and connecting networks -- for the majority of its revenue. These are slow-growth categories within which the company looks poised to remain a leader. It's shifting to a more software-focused model, however, in order to take advantage of technology trends, like the Internet of Things, and to offset threats posed by hardware competitors and the replication of routing and switching functionality through software solutions. The outlook for the company's hardware component is still solid, but building recurring revenue streams through software and services offerings is a move that should strengthen its business substantially over the long term.
Cisco trades at roughly 13 times forward earnings estimates -- a low multiple that suggests the sort of downside protection that's ideal for retirement portfolios -- and the stock is further fortified by a strong returned-income component. The company is relatively new to the dividend game, having first initiated payments in 2011, but it's raised its dividend in each subsequent year, and done so at a compound annual growth rate of roughly 30%. Cisco's yield already looks chunky sitting at roughly 3.6%, and with the cost of distributing its forward dividend representing just 54% of trailing earnings and 46% of free cash flow, the company has plenty of room to continue increasing its payout.
Premium profit opportunity
Rich Duprey (Diageo): Whether it's beer, wine, or spirits, drinkers are scaling up their taste preferences and buying premium and super-premium alcoholic beverages, while shunning lower-end hooch. It's why craft beer remains a growth industry even though mass-produced brands stumble, and why premium-priced spirits such as whiskey, bourbon, and tequila continue to pad distiller profits.
Diageo is perfectly situated to capitalize on all these fronts, and it's doing so. Last month, it posted higher-than-expected fiscal full-year earnings, and sales rose 15%, ahead of Wall Street's expectations. The big winner was scotch whisky, which had almost 5% organic growth, and Diageo was able to say that every country in which it operates saw higher sales.
Diageo owns a portfolio of high-end beers, wine, and spirits that account for two-thirds of its net sales, including Ciroc vodka, Don Julio tequila, Bulleit bourbon, and Guinness beer. Recently, the distiller agreed to purchase from George Clooney the premium Casamigos tequila for $1 billion, including performance payouts.
While Diageo's stock is priced at record highs, it's showing the market is willing to pay a premium price for a premium beer and liquor distributor. There's no reason to believe the shift in taste preferences won't continue for a long time to come, making Diageo's stock a good one for retirement. While it does trade at 23 times earnings and 18 times next year's estimates, the distiller appears to be worth it.
It also pays a dividend of $4.06 per share that's yielding 3.1% annually; this would help smooth out any bumps Diageo might encounter. Approximately 40% of Diageo's total dividend is expected to be paid as an interim dividend and approximately 60% as a final dividend, with the company expecting to raise the payout every six months at a rate of about 5% until it's back in its targeted dividend cover range. Currently, the dividend cover, or the ratio of earnings per share to dividends per share, is 1.5 -- Diageo seeks a range of 1.8 to 2.2.
Regardless of how long the increases continue, Diageo represents a good stock for retirement.
Keith Noonan has no position in any stocks mentioned. Keith Speights owns shares of Pfizer. Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Diageo. The Motley Fool has a disclosure policy.