The last thing anyone in retirement should ever consider is to invest in speculative stocks. Once one's prime earning days are behind them, protecting the principal value of that nest egg is paramount. At the same time, though, people are living longer, and having to draw down one's savings isn't a viable option over a long period, either.
The best way to thread the needle between these two competing ideas is to invest in stable businesses that sell at a reasonable price today. Here's why our Motley Fool investors picked American Tower (AMT 0.17%), Brookfield Infrastructure Partners (BIP 3.35%), and Cisco (CSCO 0.44%).
Image source: Getty Images.
A proven winner
Brian Feroldi (American Tower): Can you imagine life without your smartphone? I certainly can't, and I know that hundreds of millions of consumers around the world feel the same way. Our collective dependence on smartphones has fueled huge growth in the demand for bandwidth over the last decade that carriers everywhere have been struggling to fulfill.
But with the smartphone usage rates on the rise and 5G right around the corner, how will wireless carriers be able to keep up? One way is to partner with companies like American Tower, which owns more than 160,000 cellular towers spread around the world and rents out space on them to mobile carriers that want to blanket an area with coverage.
The setup is ideal for both parties because telecoms don't have to hassle with finding and maintaining their own towers while American Tower benefits because it can colocate several carriers on a single tower and gets to earn predictable revenue from its tenants.
This business model has worked out beautifully for shareholders of American Tower over the years.
SPY total return price data by YCharts.
What's more, the company's push into international markets and strong pricing power should ensure that revenue and profit growth continue for the foreseeable future.
However, American Tower currently sports a trailing price-to-earnings ratio of 51, so you might raise an eyebrow at my assertion that it's a value stock. I'd shoot back by pointing out that American Tower is organized as a real estate investment trust, or REIT, which makes the P/E ratio is a poor indicator of value. Instead, I prefer to use adjusted funds from operation (AFFO) as a proxy for earnings. This metric shows that shares are trading for about 21 times trailing AFFO, which is much more attractive. Combined with the fact that this company pays out a fast-growing dividend that currently yields 2.2%, I think right now is a great time to buy into a proven winner that is still growing by double digits.
A proven track record of doing right by shareholders
Tyler Crowe (Brookfield Infrastructure Partners): When you're investing in retirement, you want stability above anything else. On top of that, a company that can provide a reliable dividend and some modest growth over time makes for a solid investment. One company that checks all of these boxes is asset manager Brookfield Infrastructure Partners.
Brookfield Infrastructure owns several businesses ranging from electric transmission lines, toll roads, natural gas distribution pipelines, water desalination plants, and fiber-optic cables. These businesses span over 15 countries and immediately give investors geographic and asset diversity that helps to offset periods of weakness in any one particular business. What is also important is that all of these assets are long-life assets with contracted revenues for several years into the future. This ensures a certain level of revenue and cash flow stability that gives management the ability to deliver consistent dividend increases over time.
What is even more encouraging for people in retirement is that Brookfield's management has a plan that keeps shareholder value at the forefront of its decisions. Unlike many other income-focused investments that concentrate on dividend growth at all costs, Brookfield instead elects to focus on growing its payout at a reasonable rate -- 5%-9% -- and investing in growth without having to consistently access the capital markets for funding. This is how the company has been able to generate 20% annualized returns since its inception a decade ago, and it's a plan that has the potential to work for years into the future. If you are looking for a retirement-worthy investment that will provide stability, income, and growth, Brookfield Infrastructure Partners should be high on your list.
An evolving tech giant
Leo Sun (Cisco): Cisco is the largest manufacturer of networking switches and routers in the world. Those are slow-growth businesses, and Cisco is losing market share in both markets to rivals like Huawei. However, Cisco also has several big catalysts on the horizon, which aren't fully reflected by its forward P/E of 16.
First, the company is aggressively diversifying its core business into software and services -- like cybersecurity and enterprise collaboration solutions -- which are bundled with its hardware products. That strategy, which is supported by a streak of acquisitions of smaller companies, should widen its moat against potential challengers.
Second, it's repatriating $67 billion in foreign earnings back to the U.S. after changes in the tax law. That's a game-changing move for Cisco, which only held $2.4 billion of its $73.7 billion in cash, cash equivalents, and investments during the second quarter.
Cisco already earmarked $44 billion of that total for buybacks and dividends, with the rest reserved for potential acquisitions in the U.S. Those moves will dramatically reduce its valuation, boost its dividend yield (which is already at 3%), and support its inorganic growth strategy.
Wall Street expects Cisco's revenue and earnings to rise 2% and 8%, respectively, this year. But next year, its revenue could go up 3% as its earnings climb 11%. Cisco already rallied 20% this year, but I think its evolving growth strategy, repatriation plans, and low valuation make it a solid retirement play.
