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Top 3 Stocks for Retirees to Consider

By Anders Bylund, Dan Caplinger, and Jason Hall - Oct 30, 2017 at 6:13PM

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Retirees should look to International Paper, The Tile Shop, and Caterpillar for a strong mix of stability and dividend income. Read on to learn more.

Investing doesn't stop just because you're retiring. But the needs and requirements for a post-retirement portfolio are very different, placing a heavy emphasis on low-risk value protection and high-income dividend payments. The exact balance between these pillars of the retiree's investing strategy will vary from person to person, but these are the basics.

So we asked a handful of your fellow investors here at The Motley Fool to share some great stock ideas for today's retired investor. Read on to learn more about The Tile Shop (TTSH 3.15%)Caterpillar (CAT 2.52%), and International Paper (IP 2.12%).

Close-up of an old woman's hands counting gold coins.

Image source: Getty Images.

It's OK for retirees to operate heavy machinery

Dan Caplinger (Caterpillar): Many retirees avoid cyclical stocks because they believe that they can't afford to wait long enough to go through an entire business cycle. For those with shorter time horizons, it's true that the danger of buying at the top of a cycle and having to sell at the bottom is an issue.

With Caterpillar, though, the heavy-equipment manufacturer has only just started to see a rebound from a long period of underperformance. Strength in North America has helped lead Caterpillar forward, and the company has plenty of prospects for future growth.

Caterpillar's slump came in the face of poor price performance in the energy and materials space. The recovery in those areas has helped power revenue and earnings higher at Caterpillar, and the response has been a nice bounce in the stock's price. Even with the recent gains, Caterpillar has an above average dividend yield of 2.4% to give retirees the income that they need.

Caterpillar also has future growth potential, especially if anticipated efforts to bolster infrastructure and construction spending eventually come to pass. Caterpillar isn't the bargain it was a year ago, but it's still a reasonable choice for retirees looking for some cyclical exposure.

Forget the paperless office!

Anders Bylund (International Paper): This company passes all kinds of interesting tests:

  • Centennial operating history? Check!
  • Could be run by a ham sandwich? Check!
  • Invest in what you know? Check!
  • Boring business, solid stock? Check!
  • Years and years of steady dividend payments? Check!

And that's just scraping the surface of International Paper. We're talking about a centennial giant of its chosen industry. The dividend checks have been coming every quarter, without fail, since 1970, and the annual payout has increased by 1,800% over the last 17 years:

IP Chart

IP data by YCharts

The world's largest provider of paper and cardboard may seem like a quaintly outdated choice these days, but the paper business is not going away in this digital age.

If nothing else, International Paper also dominates the market for industrial and consumer packaging, with a customer list that includes most fast-food restaurants, every mail-order retailer worth mentioning, and the Federal government. In fact, the Fed is International Paper's largest customer ,and (AMZN 3.53%) buys half of its shipping materials from this provider.

So you get a market leader in an industry nearly immune to macroeconomic threats, with an efficient cash machine that has hooks into the growing e-commerce market. On top of all this, International Paper provides a generous 3.3% dividend yield that's sure to keep growing.

What's not to love?

A risk-reward growth play

Jason Hall (Tile Shop Hldgs): Tile Shop has been a very volatile stock to own over the past several years. It's also proven to be a big money loser, with shares down almost 60% in only a few months. 

So why would a retiree -- who needs to be focused on preserving capital and generating income --  consider Tile Shop? Because it's a great business with solid growth prospects, and the market's sell-off has given investors a wonderful opportunity to profit at a reasonable price. Plus, most retirees will live into their 80s and should invest some of their nest egg for growth. 

Let's differentiate between a bad company and a bad stock. Over the past couple of years, Tile Shop has improved by leaps and bounds under CEO Chris Homeister. Since he took over, Tile Shop has cut its debt by 85% and increased its cash position. It has also invested more money training and retaining its best store employees. This has helped improve sales to both DIYers and tile pros, while also building a bench of talented future managers for new stores. 

Tile Shop's earnings are up 80% since 2015 in no small part because of Homeister's actions as CEO. Here's the rub: The sell-off has Tile Shop trading for around 25 times earnings, the same as the S&P 500. That makes Tile Shop a great price for the quality of the business and the growth prospects in front of it. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Amazon. Dan Caplinger has no position in any of the stocks mentioned. Jason Hall owns shares of Amazon and Tile Shop Holdings. The Motley Fool owns shares of and recommends Amazon. The Motley Fool also recommends Tile Shop Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Caterpillar Inc. Stock Quote
Caterpillar Inc.
$190.72 (2.52%) $4.69
International Paper Company Stock Quote
International Paper Company
$43.41 (2.12%) $0.90
Tile Shop Holdings, Inc. Stock Quote
Tile Shop Holdings, Inc.
$3.93 (3.15%) $0.12, Inc. Stock Quote, Inc.
$142.69 (3.53%) $4.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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