Think fast: Which category of stocks, value or growth, has been the better bet for investors? While both have delivered significant gains, value stocks have outperformed over the past 90 years, according to a Bank of America/Merrill Lynch report.
Since the Great Recession, however, we've witnessed a clear reversal, with growth stocks leaving value stocks in the dust, likely as a result of below-average interest rates. With the Federal Reserve walking on eggshells and taking its time raising rates, growth stocks are liable to outperform value stocks for some time to come.
With this in mind, we asked three of our Foolish investors to name one growth stock that'd be perfect for the retiree who not only wants a little income but also needs to see his or her nest egg appreciate in value in response to lengthening life expectancies. Our investors came up with payment processing giant Visa (NYSE:V), precious metal royalty and streaming company Royal Gold (NASDAQ:RGLD), and footwear and accessories juggernaut Nike (NYSE:NKE) as stocks worth considering.
Double-digit growth for decades to come
Jordan Wathen (Visa): Few companies have a runway for growth as long or as obvious as Visa, in my view. The company has two big growth drivers: (1) from the shift from cash and check to card-based payments, and (2) from increased economies of scale, since its expenses don't scale directly with increases in revenue.
Around the world, consumers are shifting cash transactions to cards, resulting in an obvious source of growth for payment networks like Visa, which take a small slice of each transaction for acting as a toll road in between card issuers, merchants, and consumers.
Visa's fourth-quarter earnings report revealed that payments volume increased by 10% on a constant dollar basis, which excludes foreign exchange fluctuations. The number of processed transactions increased 13% compared to the year-ago period.
I expect high single-digit increases in revenue and profit for a long time to come. Visa's ability to pay out almost all of its earnings in the form of dividends and repurchases only add to its allure as a growth stock for the long haul, given that it doesn't need to make substantial investments in its underlying business to capture a slice of card payment volume.
One lustrous out-of-the-box growth stock
Sean Williams (Royal Gold): Growth stocks are an excellent choice for investors at the moment since low interest rates continue to encourage businesses to expand. One company that growth investors, especially retirees, might want to look into Royal Gold.
Royal Gold isn't a traditional mining company in the sense that it develops and produces gold, silver, and other byproducts. Instead, it's a royalty and streaming company that sits back and collects some of the highest margins in the industry. Mining companies that are looking to expand an existing mine or develop a new mine come to Royal Gold for financing. In return for this up-front capital, Royal Gold receives very long-term rights to a percentage of gold or silver production at a well-below market rate. Royal Gold then sells its gold or silver at the spot rate and pockets the difference. In July, Royal Gold announced that its average cost of sales per gold ounce was just $318, compared to the $1,259 it recognized per gold ounce sold in Q4 2017.
Contract partner diversity is another reason to be excited about what Royal Gold can offer retirees. The company has 39 currently producing properties, along with 22 key properties in development. What this means is that if one or two properties runs into a labor contract dispute or has to cease operations to fix broken machinery, it's unlikely to derail Royal Gold. It also means the company has a long line of new mines readying to produce in the near future.
A bullish case can also be made for gold over the long run. For instance, demand has risen steadily in recent years while production growth has been minimal. A slow increase in interest rates, coupled with a weaker dollar, has also been a boon for the yellow metal. No company is liable to feel a more immediate impact on higher gold prices than Royal Gold.
And finally, retirees receive a gold-price dependent dividend. Currently yielding 1.1%, Royal Gold provides the icing on the cake for growth-seeking seniors.
Investing for retirement? Just do it
Keith Noonan (Nike): With its relatively low risk profile, a track record of dividend growth, and compelling avenues to long-term earnings gains, Nike stands out as a smart growth stock for retirees.
The company's stock price has stagnated amid soggy retail sector results, but partnerships with Amazon.com and its own direct-to-consumer sales initiative should help move the Swoosh away from dependence on outlets like Foot Locker and The Finish Line. Direct-to-consumer selling, an ongoing share buyback push, and a cost-cutting initiative should give the company some near-term earnings momentum, but its biggest growth growth drivers will likely come from international markets like China and Western Europe.
Compared to the broader market, the company looks fairly valued at roughly 22 times trailing earnings. In fact, its trailing earnings multiple is near a five-year low so there's some evidence that shares are actually quite cheap at current prices.
The stock also comes with a 1.4% yield. That might not look like much, but that company has raised its dividend annually for 15 years and has boosted its payout at an average annual rate of 15% over the last five years and 13% over the last decade. With a payout ratio of just 32%, there's still plenty of room for big payout increases down the line.
Nike's time-tested brand and unmatched supply chain network form a moat that should help it capture growth in the apparel industry, and its reasonable valuation and dividend component round out a profile that's a great fit for retirees.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jordan Wathen has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Sean Williams owns shares of Bank of America. The Motley Fool owns shares of and recommends Amazon, Nike, and Visa. The Motley Fool has a disclosure policy.