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4 Top Stocks for Retirees

By Leo Sun – Jun 23, 2020 at 6:15AM

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AT&T and three other blue chip stalwarts are still great stocks to “buy and forget” for worried retirees.

The longest bull market in history, which started from the nadir of the financial crisis in 2009, ended earlier this year as the COVID-19 pandemic slammed the global economy. The S&P 500 has recovered most of its losses since its steep crash in March, but the sudden volatility in this index likely rattled many retirees.

In this wobbly market, retirees should focus on companies with wide moats, low valuations, and high dividends with reasonable payout ratios. Four stocks that fit the bill are AT&T (T -1.42%), Procter & Gamble (PG -0.46%), IBM (IBM -2.08%), and Cisco (CSCO -1.19%). Let's take a closer look at each and see what makes them top stocks for retirees.

A piggy bank next to blocks spelling out "2020" on piles of coins.

Image source: Getty Images.

Strong businesses with wide moats

All four of these companies have long operating histories and wide moats. The modern AT&T, which was born after the original AT&T was split into several regional carriers in 1984, is now the largest wireless carrier and pay-TV provider in the U.S. It also became a media titan after its takeover of Time Warner two years ago.

P&G was founded over 182 years ago, and it sells iconic brands like Bounty, Charmin, Crest, Head & Shoulders, Gillette, Pampers, and Tide. IBM, which was founded in 1911, owns one of the world's largest enterprise hardware and software businesses. Cisco was founded 35 years ago and is now the world's largest producer of network switches and routers.

Solid fundamentals and high dividend yields

AT&T, P&G, and IBM are all Dividend Aristocrats of the S&P 500 -- elite members of the index which have raised their payouts for at least 25 straight years. Cisco has also raised its dividend every year since it started paying one in 2011.

All four companies pay forward dividend yields of over 3%, and their cash dividend payout ratios -- the percentage of their free cash flow spent on dividends -- have remained well below 100% over the past 12 months. Their stocks also trade at reasonable forward P/E ratios:

Stock

Forward P/E Ratio

Forward Dividend Yield

Cash Dividend Payout Ratio

Consecutive Years of Dividend Hikes

AT&T

10

6.9%

54.8%

36

P&G

23

2.7%

56.9%

64

IBM

11

5.3%

50%

25

Cisco

14

3.1%

40.4%

9

Source: Company websites, Yahoo Finance as of June 20.

Identifying the near-term challenges

AT&T, IBM, and Cisco are all trading at low valuations for specific reasons.

AT&T is shouldering lots of debt from its acquisitions of DirecTV, AWS-3 spectrum licenses, and Time Warner -- and it's trying to reduce its leverage while building a streaming media ecosystem. It's also losing pay-TV users as its wireless unit faces fierce competition from rivals like Verizon.

IBM is trying to expand its higher-growth cloud business, which recently absorbed Red Hat, to offset the slower growth of its legacy businesses -- but it faces fierce competition from Amazon and Microsoft in the cutthroat cloud market.

Cisco remains the market leader in switches and routers, but it faces intense competition from rivals like Huawei, which sells cheaper products, and Arista, which wants to replace traditional routers with switches and software-based solutions.

Meanwhile, P&G is trading at a slight premium as COVID-induced shopping boosts sales of its core consumer staples like toilet paper, paper towels, diapers, and cleaning products. However, it could face tough year-over-year comparisons after the pandemic passes.

Can these companies overcome their near-term challenges?

Those near-term challenges seem daunting, but these four companies aren't sitting still and letting their businesses stagnate.

AT&T is unifying its fragmented streaming ecosystem by eliminating redundant services, and it's protecting its dividend by suspending its buybacks, cutting costs, and divesting its non-core businesses.

IBM's new CEO, Arvind Krishna, previously led its cloud and cognitive software unit -- and could shore up Big Blue's defenses against Amazon and Microsoft. Cisco can acquire more businesses to bolster its higher-growth application and security divisions, which can offset the slower growth of its core infrastructure business.

P&G's sales will inevitably dip after the panic buying cools off, but the strength of its core consumer staples brands should offset the sluggishness of its weaker grooming and beauty brands for the foreseeable future.

In short, all four stocks withstood steep downturns before, and they'll likely ride out the near-term volatility and generate stable returns over the next few years -- which makes them great stocks for retirees to "buy and forget."

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, AT&T, and Cisco Systems. The Motley Fool owns shares of and recommends Amazon, Arista Networks, and Microsoft. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$122.71 (-2.08%) $-2.60
AT&T Inc. Stock Quote
AT&T Inc.
T
$16.01 (-1.42%) $0.23
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$40.66 (-1.19%) $0.49
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$135.58 (-0.46%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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