Despite the common myth, retirees should not get out of stocks altogether. Stocks are an essential component of a well-allocated investment portfolio, regardless of age.
Having said that, when you're retired, it's important to be a bit more careful about the stocks you select. Specifically, income and capital preservation should become more of a priority than for pre-retirees, although long-term growth potential is still an important factor. Here's why our contributors think Chubb Ltd. (NYSE:CB), Cisco Systems (NASDAQ:CSCO), and HCP (NYSE:HCP) are all smart choices for retired investors.
Build wealth with this best-of-breed stock
Jordan Wathen (Chubb Ltd.): Insurance stocks are a bad way to get rich quick, but they're a great way to build long-term wealth. Shares of one of the industry's best, Chubb Ltd, are an attractive buy for investors who take the long view.
Chubb takes the No. 1 spot in insurance lines for commercial businesses, high-net-worth families, crops, and professional insurance. It's one of the largest insurers for middle market enterprises, private businesses that would be micro- or small-cap companies if they were publicly traded.
Its scale affords it the ability to do what few insurers can to mitigate losses. When wildfires burned through California neighborhoods this fall, Chubb hired its own firefighters to go in and protect the homes of its high net worth clientele. The ability to provide a higher level of service enables Chubb to charge premium prices in a commodity industry.
The case for Chubb is simple: When it comes to allocating capital and managing risk, it's among the very best. Management is compensated for growing tangible book value per share and holding down its combined ratio, precisely what you want to see in any insurer's compensation scheme.
Priced at 2.3 times tangible book value, Chubb is no obvious bargain. That said, I believe investors can eke out market-beating returns thanks to a combination of stellar underwriting and rising interest rates, which would bolster investment income earned on its $97 billion bond portfolio.
The technology titan that makes our world ever smaller
Chuck Saletta (Cisco Systems): The internet has become central to connecting us together in our everyday lives, and Cisco Systems plays a pivotal global role in enabling that connectivity. That central role in our modern world gives Cisco a huge footprint and base of operations. While the major initial buildout of internet infrastructure may be largely behind us, there's still money to be made in maintaining and upgrading that capacity to cover ever-higher bandwidth needs.
For a retiree looking to fill the growth portion of his or her investment accounts, that situation makes Cisco worth considering. As the company is no longer considered a high-growth darling, its shares are available at a reasonable 14 times its anticipated forward earnings. With a five-year anticipated earnings growth rate of around 9%, that multiple means investors have a reasonable opportunity to capture some of that growth for themselves through stock price appreciation.
With a 3% yield that represents just under 60% of its earnings, Cisco rewards its owners with a decent and well-covered dividend that it should be able to maintain as long as its operations remain strong. That's money back in investors' pockets regardless of what its share price does, giving retiree shareholders an opportunity for a return even if its stock goes nowhere. Cisco has regularly increased that dividend since it instituted it in 2011, providing reason to believe that the trend can continue as long as it is able to increase its earnings.
Lots of growth potential without lots of risk
Matt Frankel (HCP): Over the past couple of years, healthcare real estate investment trust HCP has transformed itself into a focused, high-quality collection of healthcare properties backed by a solid balance sheet and good financial flexibility.
HCP has 818 healthcare properties in its portfolio, most of which are senior housing (39%), medical office (27%), or life science properties (27%). Ninety-five percent of the portfolio tenants depend on stable and predictable private-pay revenue sources -- the best ratio of the big healthcare REITs.
The most compelling reason to invest in HCP now is the expected growth in the healthcare industry over the next several decades. In a nutshell, the U.S. population is aging fast. The massive baby boomer generation is reaching retirement age, and Americans are living longer. From 2020 through 2030 alone, the 75+ population is expected to grow by 50%, adding 11 million people. This should be a major catalyst for healthcare, especially senior housing and medical offices, which make up the majority of HCP's portfolio. In fact, over the next decade, healthcare spending is expected to rise by $2.3 trillion, which should translate to tremendous growth potential for HCP.
With lots of long-term growth potential and a 5.6% dividend yield, HCP could be an excellent stock for income-seeking retirees who also want to grow their nest egg.
Chuck Saletta owns shares of Cisco Systems. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel owns shares of HCP. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.