Retirement is typically viewed as the time when people have to be extremely conservative with their investments, eschewing risk to protect their nest egg. And while there's a lot of truth to that -- particularly with investments you'll need to sell for income within the next five years -- the reality is, too little exposure to more volatile investments like stocks can lead you to running out of money before you're done living. And since most Americans will live into their 80s, this is a real concern for many retirees.
The good news is that the longer you own stocks, the lower your risk of permanent losses and the better your chances of of generating superior returns to other investments. That can make a huge difference in your life as you get older. Value stocks -- that is, companies that trade at a discounted price by some measure, creating both upside and a margin of safety -- can be excellent for retirement.
We asked three investors to help us find great value stocks for retirement, and they identified Starbucks Corporation (SBUX 3.42%), General Mills, Inc. (GIS 1.31%), and Caretrust REIT Inc (CTRE 6.01%) as meeting their individual criteria for value. If you're looking for the best value stocks for your retirement, keep reading to learn why these three stocks make the cut as solid value for retirement.
Want to make sure your nest egg lasts long enough? Value stocks can help. Image source: Getty Images.
Start your retirement right with this coffee giant
Steve Symington (Starbucks): When Starbucks announced weaker-than-expected same-store-sales growth in the U.S. last quarter, it was hard to blame investors for punishing shares of the coffee juggernaut. After all, same-store-sales growth in the United States arrived at just 2%, lagging the company's guidance for comps to grow in the 3% to 5% range for the full year. For that, Starbucks blamed a combination of light sales in limited-time holiday items, as well as softness in visits by occasional non-Starbucks Rewards members.
Curiously, Starbucks reiterated its guidance for 3% to 5% full-year comps growth, albeit while admitting its final results may arrive near the lower end of that range after its slow start to the year. But more important to retired investors is that, putting aside this temporary seasonal weakness in the U.S., Starbucks' core business remains healthy.
In addition, keeping in mind Starbucks collects only around 30% of its total revenue outside the U.S., the company is quickly expanding its global store base as we speak. Starbucks opened 188 new locations in China last quarter to bring its total in the country to over 3,100 stores. But that's still a small fraction of Starbucks' more than 28,000 locations at the end of last quarter, around half of which are located in the U.S. And according to CEO Kevin Johnson during last quarter's call, China's middle class is expected to reach 600 million consumers by 2021 -- or nearly twice the size the entire population of the United States. It's no surprise, then, that Starbucks eventually expects China to eclipse its stateside base.
Given the combination of global growth potential, the stock's recent drop, and a generous dividend yielding 2.14% annually as of this writing, I think Starbucks is as appealing a portfolio candidate as any retiree could hope to find.
Driving growth
Daniel Miller (General Mills): Investors looking for tantalizing stock options for retirement should absolutely consider General Mills, a manufacturer of branded consumer foods that owns brands such as Cheerios, Betty Crocker, Pillsbury, and Nature Valley, among many others. According to Morningstar's consensus estimates, General Mills trades at a cheap forward price-to-earnings multiple of 16 and even offers investors a juicy 3.7% dividend yield.
It's General Mills' recent move that has some investors even more interested: its all-cash acquisition of Blue Buffalo (NASDAQ: BUFF). General Mills acquired Blue Buffalo for $40 per share for an enterprise value of $8 billion, giving it access to the fast-growing wholesome natural pet food category. In fact, Blue Buffalo will become a new operating segment for General Mills, and the former has posted three-year net sales compound annual growth rate (CAGR) of 12% and adjusted-EBITDA CAGR of 18%.
It should be a brilliant move for General Mills, and the acquisition will be immediately accretive to net sales growth and operating profit margin. General Mills will be able to leverage its extensive capabilities in sales, supply chain, and research and development to create cross-selling and revenue synergies, as well as $50 million in cost synergies.
General Mills already had plenty to offer investors with its 3.7% dividend yield and slew of recognizable brands. Its acquisition of Blue Buffalo signals to investors that it's still looking for growth through acquisitions, and at a forward price-to-earnings multiple of 16, General Mills is a great value stock for retirement.
Short-term fears creating an opportunity for big long-term gains
Jason Hall (Caretrust REIT): Over the past six months, shares of Caretrust REIT have fallen more than 32%. And while a big drop like this would be devastating if it was an investment you planned to sell in the short term, it's a wonderful opportunity to buy shares of what could be an incredibly profitable long-term dividend growth investment.
So why the big sell-off recently? In short, there are fears that rising interest rates will hurt real estate investment trusts like Caretrust, and that's pushed a lot of other REITs down as investors have fled the sector. But it's also created a great opportunity to invest in a long-term trend that should more than compensate for rising rates.
Caretrust invests in retirement communities, skilled nursing, and rehab facilities. America's senior population will climb past 80 million in 2029, more than doubling since 2010 while the 80-plus population will also double as life expectancies increase. As a small property owner in this space -- 189 properties at last count out of the tens of thousands in the U.S. -- Caretrust will find its success dependent on its ability to grow at a faster rate than its bigger peers. Since going public it's done just that, more than doubling its property count and rents.
With Caretrust trading for 11.4 times 2017 normalized funds from operations and paying a 5.6% yield at recent prices, now is an excellent time for retirees to buy shares for the long-term part of their portfolio.
