Every American needs to build a rock-solid retirement fund to ensure they can enjoy the good life once they exit the workforce. One way to do just that is to buy a basket of strong dividend stocks and hold them for the long term.
But which income stocks in particular are worth purchasing today? We asked a team of investors to weigh in, and they picked General Motors (NYSE:GM), Verizon Communications (NYSE:VZ), and The TJX Companies (NYSE:TJX).
An old giant that is out-disrupting its disruptors
John Rosevear (General Motors): General Motors might not seem like an obvious choice for someone looking to build a nest egg. After all, it's an old-line cyclical industrial company in an industry that's about to be disrupted by new technology. Isn't it?
It is, and yet that's one part of what makes GM so interesting as an investment right now. CEO Mary Barra has GM better positioned than just about any other automaker to not only survive the coming high-tech "mobility" revolution but to thrive and profit. Even better for our purposes, Wall Street is just now starting to catch on to this story.
It's a good story, too. Quietly, GM is emerging as a leader in two potential high-profit future technologies, electric cars and autonomous driving systems. It has big investments in shared mobility, including its wholly owned Maven car-sharing subsidiary and a fat stake in Lyft. And here in today's world, it's reaping fat profits from its hot crossover SUVs while making a big move into luxury with its overhauled Cadillac brand.
Over the next several years, those should combine to generate significant bottom-line growth for GM. And here's the other factor that makes GM an intriguing nest-egg choice: It pays a nice dividend (yielding about 3.6% right now) that should be sustainable through a recession.
While Wall Street has recently started to catch on to this story, GM's stock is still a bit undervalued at about 7.1 times earnings. That gives it some downside protection when times get tough, and should set it up for a nice jump when sales start to recover on the other side.
Long story short: Particularly if your horizon is longer than three or four years, there's a lot to like about GM's stock right now.
A high-speed dividend
Travis Hoium (Verizon Communications): There are only four major cellphone companies in the U.S., and AT&T and Verizon Communications are clearly a cut ahead of the smaller Sprint and T-Mobile. As one of the industry leaders, Verizon has pricing power and the scale to offer fast connections across the country. You can see below that being in a top position has led to a consistently profitable business with strong cash flow.
The drop in free cash flow that started in 2016 is partly due to increased competition and partly due to investments in building out a next-generation 5G network. The faster network will give the company pricing power with customers who upgrade to new smartphones, but it could also expand the business in a big way. Verizon has been testing a 5G home wireless internet product, which could allow it to enter millions of homes across the country. Then there's the addition of millions of new connected devices like watches, autonomous vehicles, and virtual reality headsets that need a powerful network.
Verizon's core telecommunications business already powers its 5.3% dividend yield, but it's future growth that investors should be excited about. If Verizon can take a leadership position in 5G wireless and push that product into new markets beyond smartphones, it could be a growth stock for another decade, with a growing dividend to boot.
This retailer is built to last
Brian Feroldi (TJX Companies): The market seems convinced that every retail stock will eventually fall prey to Amazon. While I think that many weak concepts will eventually die off, I also believe that strong retailers with differentiated business models can continue to thrive even as the e-commerce giant gains steam.
One company that stands a great chance of surviving the e-commerce onslaught is TJX Companies. It's the parent company behind a number of discounted-goods concepts such as T.J. Maxx, Marshalls, HomeGoods, and more. The company buys unwanted brand-name apparel and retail goods at huge discounts directly from manufacturers and then sells them at bargains prices in its many stores. This offers consumers a "treasure hunting" experience that simply cannot be replicated online. When combined with the huge savings, TJX Companies has proven itself to be remarkably resistant to the ever-changing retail landscape.
Looking ahead, Wall Street currently expects TJX to grow its bottom line by double digits over the next few years, thanks to the combination of new-store openings, modest comps growth, and continued stock buybacks. That's quite strong for a company that is currently trading at around 16 times forward earnings. Throw in a dividend yielding 1.8% that consumes only 31% of profits and I think that right now is a great time for income investors to warm up to TJX Companies' stock.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Amazon. John Rosevear owns shares of Amazon and General Motors. Travis Hoium owns shares of AT&T and Verizon Communications. The Motley Fool owns shares of and recommends Amazon and Verizon Communications. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.