Many retirees are turning to the stock market to find reliable income. We Fools think that's a smart move, so long as they are careful with their stock selection.
So which income stocks do we favor for retirees? We asked a team of investors to weigh in and they picked Ford (F +3.46%), AES (AES 0.21%), and Texas Roadhouse (TXRH +3.26%).
Ford gave its huge-selling F-150 pickup a new grill and some new features for 2018. The update should help keep the F-150 on top of the sales charts. Image source: Ford Motor Company.
It's hard to beat this all-American icon
John Rosevear (Ford Motor Company): Why do I like Ford for retirees? Here are a few reasons:
- It's fairly cheap at the moment. Ford is plenty profitable, with low debt, good management, and a fat cash reserve to keep it healthy through the next recession. But automakers, in general, are a little out of favor with Wall Street right now, so Ford is trading at just eight times its expected 2017 earnings.
- A nice dividend. In absolute terms, Ford's dividend is modest and sustainable. But because the stock is cheap, the yield is a fat 4.8% right now. That's a return that you'll get no matter what happens to the stock price.
- It could become an intriguing growth story over the next several years, but it's unlikely to crash and burn.
Let me explain that last one. It's no secret that new technologies like electric drivetrains and self-driving systems, along with the new shared-mobility business models those technologies will enable, are threatening to upset the long-established auto industry apple cart.
But I think Ford will thrive amid the changes. CEO Jim Hackett has a deep understanding of technological disruption, and he's plotting a course for Ford that will make it a player in the new high-tech parts of the business while keeping its existing core business in good health. If it pans out -- and the odds look good that it will -- it should mean significant growth for both Ford's profits and its stock price.
A utility of the future
Travis Hoium (AES): Very few energy companies today are prepared for the energy transition happening right under our noses. Renewable energy and energy storage have gotten so cheap that they're going to disrupt traditional utilities all the way down to transportation. AES has taken this disruption more seriously than most, betting its future on renewables and energy storage.
On the renewable side, AES bought half of sPower this year to become one of the biggest solar developers in the country. On the energy storage side, it created a joint venture called Fluence with Siemens this year to develop and deploy commercial- and grid-scale storage solutions. The two businesses are developing the energy solutions and technology we'll use for the next century and could even work together to offer renewable energy solution for around the clock energy to businesses or the grid.
What AES can do now is use its existing utility business to fund next-generation growth opportunities. In the last year, AES has generated $2.5 billion from operations, which goes to fund new investments and a dividend. The new investments are why long-term investors should like the stock but retirees should jump in because of the 4.3% dividend yield. As a utility with an eye on the future, AES is one of the few energy stocks retirees should be betting on today.
Bucking the restaurant slowdown
Brian Feroldi (Texas Roadhouse): You might be aware the restaurant industry, in general, is in a funk right now. Costs are rising and traffic is falling, which is a terrible combination.
However, not every restaurant is feeling the pain. In fact, Texas Roadhouse is still producing solid numbers in the challenging environment. Last quarter, the company's revenue and profits grew 11% thanks to a 4% bump in same-store sales. Those are numbers that most restaurants chains would kill for.
How is Texas Roadhouse succeeding where others are coming up short? My hunch is that it is simply the company's extreme focus on the mastering the basics. Texas Roadhouse is known for offering good food at great prices in a fun atmosphere. The company avoids national advertising, aims to hire friendly staff, and empowers local managers to make business decisions. When combined, these business tactics help to minimized turnover, keep costs low, and create a unique restaurant experience that creates repeat visits.
With a business winning model in place, management can focus its financial might on opening up new stores and paying out a meaty dividend. At current prices, Texas Roadhouse offers up a dividend yield of 1.75% that consumes less than half of profits. That hints that there is plenty of room left for future dividend hikes, especially as the company's profit stream continues to steadily tick higher.
