Many retirees are putting their money to work in the stock market in order to generate income. We Fools think that's a fine decision, so long as they're picky with their stock selections.
Which income stocks do we think are good choices for conservative investors to buy today? We asked a team of expert investors to weigh in, and they picked General Motors (GM 0.83%), TerraForm Power (TERP +0.00%), and Broadridge Financial Services (BR 2.81%).
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An all-American classic that sees profit growth in its future
John Rosevear (General Motors): I like where CEO Mary Barra has General Motors positioned right now for a lot of reasons, and it strikes me that some of those reasons make GM's stock a nice choice for an older investor:
- GM is on a profit-growth path. It's emerging as a leader in two potential high-profit future technologies -- electric cars and self-driving -- while boosting its profits today with new gotta-have products like its revamped line of crossover SUVs.
- GM has come a long, long way from its 2009 bankruptcy. Today, it's prepared for any future downturn, with a far more favorable cost structure, an investment-grade credit rating, and a fat $18 billion cash reserve.
- GM's dividends and share buybacks. GM pays a fairly conservative, sustainable dividend that yields about 3.5% at current prices. On top of that, Barra has committed GM to putting excess cash into share repurchases to reduce the size of GM's "float" -- and in theory, the value of its remaining shares -- over time.
- Stock price. GM's stock has risen about 30% in the last six months, but its shares are still cheap at less than eight times GM's expected 2017 earnings.
Older investors might be worried that an automaker will get clobbered when the next recession arrives. That's a fair concern, but consider this: GM's low valuation now means that its stock price is unlikely to get completely crushed in a recessionary bear market. And its strong products mean that it's likely to recover early, posting nice sales growth when buyers begin to return to its showrooms.
Long story short: If your horizon is longer than three or four years, there's an awful lot to like about GM's stock right now.
A new dividend for experienced investors
Travis Hoium (TerraForm Power): Yieldcos are companies that own renewable energy projects with years-long and sometimes decades-long contracts to sell energy to utilities for a fixed price. The resulting cash flow is then paid to investors in the form of a dividend, or yield. These stocks are perfect for investors in their golden years, and I think TerraForm Power is worth a hard look.
TerraForm went through a restructuring earlier this week and is no longer controlled by SunEdison, its former parent company, which went bankrupt. Now, it's controlled by Brookfield Asset Management, an asset manager with a history of running high-yield energy companies successfully.
Under Brookfield's management, TerraForm will pay out a very conservative 80% to 85% of cash available for distribution to shareholders in the form of a dividend, keeping some dry powder for growth, or to pay down debt. The dividend is expected to grow 5% to 8% annually through both organic growth and buying projects with cash from newly issued stock and debt.
The result is a stable energy dividend that currently yields 5.6%, based on Brookfield's projected annual dividend of $0.72 for 2018, and a strong likelihood of slow, but steady, dividend growth in the future. In your golden years, that's the kind of stock you should be looking for.
This compounding machine is trading at a fair price
Brian Feroldi (Broadridge Financial Solutions): The ideal income stock sells an essential product or service, holds a dominant market position, cranks out profits, and shares its wealth with investors. One company that checks all of these boxes is Broadridge Financial Solutions.
Broadridge is a leading provider of investor communications and trade-processing services. Thousands of publicly traded companies rely on Broadridge to help them send out proxies, prospectuses, annual reports, trade confirmations, and account statements so that they remain compliant with regulators.
When I say "leading provider," I mean it. Broadridge's market share is 80% in the U.S. and more than 50% worldwide. That's near-monopoly status. What's more, companies need to remain in constant communication with their investors, which helps to make Broadridge's revenue and free-cash-flow production fairly predictable.
BR Revenue (TTM) data by YCharts.
What does Broadridge do with its huge cash flow? The answer is that it makes occasional tuck-in acquisitions and shares the rest with investors. Broadridge has grown its dividend for 10 straight years in a row, while also plowing millions into buybacks. These factors have turned Broadridge into a wealth-creating machine.
Looking ahead, Broadridge looks poised to continue running its tried-and-true playbook. With shares trading around 20 times forward earnings and offering up a dividend yield of 1.8%, which only consumes half of its earnings, Broadridge is a top-notch stock for a retiree to consider.
