Stocks might be among the riskiest investments, but the risk factor is also why stocks have historically earned greater investor returns than bonds. Moreover, it's important to understand that the degree of risk varies with every company, which means the stock market has plenty to offer for low-risk investors.
Think about companies with economic moats, an eye on the future, and strong balance sheets to help them tide over challenges while they grow. I believe NextEra Energy (NEE 1.13%), Canadian National Railway (CNI 2.39%), and Mastercard (MA 0.13%) are three solid contenders that should suit a low-risk investor's palate. Here's why.
You could miss out on something big if you aren't investing in renewable energy
The resilient nature of demand for essentials like electricity, gas, and water makes utilities typical low-risk stocks. But looking into the future, you'd be better off owning a utility that doesn't just supply electricity and gas but uses clean sources of energy to do so.
NextEra Energy is one of the largest electric utilities in the U.S., as well as the world's largest producer of wind and solar energy, with nearly 47,000 megawatts (MW) of total operating power-generation capacity. NextEra's growth plans and dividend growth, in particular, make for a compelling investment thesis.
Between 2017 and 2020, NextEra plans to invest $17.5 billion to $19 billion on new capacity and modernization of its power infrastructure. On the renewables side, the company expects to pump anything between $22 billion and $25 billion into expanding its renewables pipeline, from roughly 28,000 MW now to 40,000 MW by 2020.
These investments should ensure NextEra continues to generate great shareholder value, as it has in the past. Its adjusted earnings per share and dividend have grown at compound annual rates of 8.1% and 8.9%, respectively, since 2005, which is an incredible record for any utility. Investors could be in for even bigger returns, with management targeting dividend growth of 12% to 14% annually through "at least" 2020. Top it up with NextEra Energy's 2.5% dividend yield, and you have the perfect recipe for a long-term winner.
A company that keeps the economy moving shouldn't fail
If NextEra Energy is a typically defensive stock, Canadian National Railway is on the other side of the spectrum -- it's a cyclical stock. Why, then, am I recommending CN to risk-averse investors? Because railroads are the preferred mode of transporting goods for the long haul, and CN is a leader in its own right with the most expansive rail network in North America, connecting three coasts.
In fact, that's just one of the reasons that you might want to own CN. End-market conditions haven't been all that great in the past ten years, but CN has been a nimble company, swiftly picking up the pieces thanks to cost efficiency and prudent management. 2018 has been a great example of this so far. Earlier this year, CN didn't just oust its then-CEO, but also invested record capital into infrastructure ahead of plans to remove unexpected operational bottlenecks. You rarely get to witness such agility among companies.
To be sure, you have to have patience as a CN investor, as cyclicality can make the stock volatile. Nonetheless, because transportation is a leading indicator of economic recovery, CN is also among the first stocks to bounce back from a trough. The company is also the most cost-efficient railroad in the U.S., has consistently generated positive free cash flow even in challenging years, and has increased its dividend every year since 1996. With its new CEO already displaying competence, shareholders' investment in CN should be in good hands.
An incredible growth stock benefiting from the financial revolution
In pretty much every sector, there's at least one disruptive trend taking shape. In financials, digital payments is one of these. While Mastercard's payments processing network is already supporting digital transactions in more than 210 countries, cash is still predominant in major parts of the world. If that should open up opportunities to expand the reach of its co-branded debit, credit, and prepaid cards as e-commerce takes off, mobile payments could be the next big thing for Mastercard.
Mastercard earns a fee every time its cards are swiped in any part of the world, and as more and more cards get into circulation, the value of Mastercard's business rises. It's a high-margin business with strong growth catalysts. Lately, Mastercard has also been focusing on services such as security, fraud prevention, and data analytics, to build upon its customer base and add a layer of diversification to its portfolio. And with mobile wallets picking up steam, Mastercard is teaming up with more and more merchants to tap this emerging cashless-payments trend.
Given its strong global foothold in a growing industry, a rock-solid balance sheet, and management committed to generating operating margin north of 50%, there's little reason to believe Mastercard shares won't continue to command a premium. I'd even say Mastercard is one of the few growth stocks with potential rewards far outweighing the risks.