Seeking out great companies that are on track to continue operating at high levels is a good goal no matter what your age, but it's also true that investing strategies should be adjusted according to your priorities. When investors are in retirement -- or getting close to it -- owning stocks that are geared toward maintaining and gradually adding to wealth you've built in your working years is a prudent move.
We asked three Motley Fool contributors to each profile a stock that should keep working for you after you've left the workforce. Read on to see why they identified Johnson & Johnson (JNJ 1.01%), Thermo Fisher Scientific (TMO 0.55%), and AT&T (T 0.81%) as stocks that are perfect for adding to your nest egg.
A classic healthcare stock
Leo Sun (Johnson & Johnson): Johnson & Johnson has raised its dividend annually for over five decades, which makes it an elite Dividend Aristocrat, meaning it's hiked its payout for over 25 straight years. J&J currently pays a forward dividend yield of 2.7%, and it spent just 50% of its free cash flow (FCF) on that payout over the past 12 months.
J&J runs three main businesses -- pharmaceutical products, consumer healthcare, and medical devices. The pharma business usually generates the highest growth, followed by the medical device unit and the consumer healthcare unit.
J&J faces certain near-term challenges, including generic competition for its former blockbuster drug Remicade, integration challenges with recent acquisitions (like Actelion), and several safety-related lawsuits.
However, J&J's three businesses are so well diversified that it's highly unlikely that any major headwind will knock the entire company off course. That's why the stock rallied nearly 270% over the past two decades, compared to the S&P 500's near-180% gain.
Wall Street expects J&J's revenue to rise 6% this year as its earnings -- buoyed by buybacks -- rise 12%. J&J spent just 15% of its FCF on buybacks over the past 12 months, so it has plenty of room to keep boosting its EPS and tightening up its valuation.
J&J trades at just 16 times forward earnings, which is lower than the S&P 500's forward P/E of 18. These factors make J&J a solid "buy and forget" stock for most retirees.
Tap into the guaranteed growth of the bioeconomy
Maxx Chatsko (Thermo Fisher Scientific): Although the words "biotech" and "biopharma" are often used interchangeably, the biopharma sector is actually not the largest part of the American bioeconomy, ranking just ahead of agricultural biotech and behind industrial biotech. The distinction is important, but so is the economic heft of the overall sector: The American bioeconomy generated an estimated $370 billion in total revenue in 2016, or over 2% of GDP, and is one of the fastest-growing parts of the economy.
That makes Thermo Fisher Scientific worth a closer look for individual investors. The $94 billion company is a top supplier (and sometimes the only supplier) of hardware, chemical reagents, consumables, diagnostic kits, and even engineered DNA products that are required to conduct biotech R&D -- whether for humans, plants, or industrial microbes.
It's been quietly riding the growth of the bioeconomy over the years and consistently beats the performance of the S&P 500 as a result. For instance, Thermo Fisher Scientific stock has delivered a five-year total return (that's stock gains plus dividends) of 164%, compared to "just" 92% for the S&P 500 when dividends are included. There are no signs the business is slowing.
In the second quarter of 2018 revenue and earnings per share grew 22% and 19%, respectively, compared to the year-ago period. The results were driven by new product launches and the continued integration of past acquisitions -- pretty much the same catalysts that have carried the business since the turn of the century. Thanks to the business' front-row seat in the bioeconomy this is one stock investors don't have to babysit. That makes it perfect for retirees -- and just about anyone else.
A big, well-rounded dividend
Keith Noonan (AT&T): AT&T stock has long been a go-to choice among investors looking to generate income in their nonworking years -- and for good reason. Even as competitive pressures and industry trends have worked to keep its share price roughly flat over the last decade, the company has built on its reputation as a dividend payer that can be counted on for big yield and regular payout growth.
AT&T's annual payout comes in at roughly 6.2% of its current stock price -- one of the highest yields in the technology and telecom sector. Investors can feel confident that shares purchased today will boast even bigger yield in the years to come as well. The company has a 34-year history of delivering annual payout growth, and with its payout ratio coming in at roughly 67% of trailing free cash flow, the telecom giant is in shape to continue growing its dividend even amid some shifts in its key industries.
The company's mobile wireless business is facing pricing pressure from competitors Verizon, T-Mobile, and Sprint, and its satellite television wing is being impacted by cord-cutting trends. Customers are moving to the less profitable skinny bundle service DirecTV Now and away from the more robust, higher-margin satellite package.
However, AT&T's growth prospects could be underappreciated. The merger with Time Warner (which admittedly can't be a counted on as a sure thing with the Justice Department appealing a federal court's approval of the deal) should give AT&T a sustainable service-bundling advantage, tap the company into the global entertainment industry growth, and drive advertising revenue growth. AT&T also looks positioned to be a winner in the Internet of Things space.
Shares have fallen roughly 20% year to date due to uncertainty surrounding the Warner merger and uninspiring guidance -- and now trade at just nine times this year's expected earnings. That looks like an attractive price for a business that still generates lots of cash flow and will continue to play a central role in communications and connectivity. With an earnings multiple that suggests relatively low downside risk and a large and sustainable dividend, AT&T is a perfect stock for retirees.