Stocking your retirement fund with dividend payers can be a great way to help generate long-term returns, but that isn't the only path to financial security. While a strong and growing yield is important, the potential for capital appreciation can help produce outsized gains.
With that in mind, we asked three top Motley Fool investors to pick stocks to help fund a nest egg. Here's why they chose Nucor Corporation (NUE +0.35%), Tanger Factory Outlet Centers, Inc. (SKT +0.11%), and MercadoLibre, Inc. (MELI 12.69%).
Image source: Getty Images.
A nest egg built of steel
Rich Smith (Nucor): It's been nearly six month since I first recommended that investors build Nucor -- a stock as rich in value as it was in dividend yield -- into their retirement nest eggs. Over those months, Nucor stock has rocketed 22.5%.
With Nucor up so much already, I'm may be tempting fate by recommending it again. But what the heck? I like Nucor -- and you should, too.
America's biggest steelmaker by market capitalization (Nucor is valued at three times the worth of U.S. Steel), Nucor is a company almost unique in American industry for espousing a no-layoff policy. When times get tough, Nucor workers pull together and share the pain. Then when things do improve, as they inevitably do, Nucor workers profit together as well -- and investors can, too.
Priced at 20 times earnings, Nucor pays its shareholders an above-market 2.4% dividend yield. Analysts see the company's earnings growing at 20% or better over the next five years. What's more, with the steel industry seeming to have hit bottom and bounced back last year, there's reason to hope analysts are right about that. With Nucor's dividend only consuming just 45% of profits, Nucor's dividend is likely to grow along with its profits.
If that helps your nest egg to grow along with it, I'd call that a win-win-win for Nucor, for its workers, and for your portfolio, too.
Retail is changing, not dying
Reuben Gregg Brewer (Tanger Factory Outlet Centers Inc.): The internet is changing the shape of retail, but the retail apocalypse hype is overkill. That hasn't stopped investors from throwing the baby out with the bathwater when it comes to mall real estate investment trusts (REITs), which is exactly what I believe is happening with Tanger Factory Outlet Centers.
Tanger owns 44 outlet malls and has long been a leading operator in this niche space. Even during the deep 2007 to 2009 recession, the REIT's occupancy remained above 95%. It's currently at around 96% despite all of the news headlines about empty malls. Even if the REIT hits a performance soft patch, the company's dividend only ate up around 55% of its funds from operations in 2016, suggesting there's little risk of a dividend cut.
A big piece of Tanger's success stems from its exclusive focus on outlet malls, which are different from the enclosed malls that are getting hit hardest by retail bankruptcies and store closings. But the shares are still down around 30% over the past 12 months, pushing the yield up to 5.2% (near its highest levels since the recession).
Meanwhile, Tanger has increased its dividend every year since going public in 1993. In fact, I expect it to become a Dividend Aristocrat in 2018. Grab this high-yielder, like I did, while it's on sale for a healthy mix of income and capital appreciation -- once investors realize that it's not facing the same risks as low-quality regional malls.
Tapping a Growing Trend
Danny Vena (MercadoLibre, Inc.): MercadoLibre may not be well-known to U.S. investors, but it certainly is to our neighbors to the south. The company has been called the Amazon of Latin America, and it is the largest e-commerce provider in the region. The company provides a payment solution called MercadoPago, similar to services pioneered by PayPal. The company delivers an enhanced ecosystem to vendors using its online sales platform that include a marketplace, payments, shipping, and software-as-a-service.
This one-stop shop has also been a hit with customers. MercadoLibre has grown its customer base by more than 20% on average, for every quarter going back six years. The number of items sold has accelerated, with year-over-year growth of 31% on average for each of the last 24 quarters. Payments has seen the most robust performance, exceeding 70% year-over-year growth, on average in each of the last 12 quarters. What's driving this growth? MercadoPago has been so successful, the company began offering it to off-platform merchants, and growth has accelerated.
If you think those numbers are impressive, consider this: Latin America is still one of the fastest-growing areas for e-commerce, with online retail sales expected to grow 19% annually over the next five years. E-commerce is still in its infancy, though, garnering just 3% of total retail in the region, compared to more than 8% in the U.S.
MercadoLibre's dividend is currently nothing to write home about, at a measly 0.18% yield, but its payout ratio is less than 20% of its profits, and this tech company is just beginning its dividend journey. The stock, meanwhile, gained more than 100% 2017, and it has quadrupled over the last five years. I think that growth will continue, which gives investors a great opportunity to feather their nest.
The bottom line
Whether it's capital appreciation, a sterling yield, or a combination of the two, there are a number of paths to a comfortable retirement. While there are no guarantees, each of these recommendations offers investors a different way to grow their nest egg.
