For most of us, buying stocks for an individual retirement account (IRA) starts with having a long-term mindset. Investors need retirement stocks that not only remain safe but have also placed themselves in a position for growth.
The consumer climate is always changing. Hence, investors cannot afford to take a "set it and forget it" approach to any stock. However, not all stocks have obvious threats to their business. Some may also generate significant amounts of dividend income that stockholders can reinvest. More importantly, they hold the growth potential to realistically fund a prosperous retirement in a shareholder's later years.
To this end, Altria (MO 0.70%), Innovative Industrial Properties (IIPR 2.21%), and Verizon (VZ 2.85%) could make suitable stocks to invest your IRA funds in due to their risk profile and potential to generate both growth and income. Let's find out a bit more about these three companies and why they might be suitable.
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1. Altria: The dividend yield stands at 7.9%
Admittedly, Altria (MO 0.70%) may seem like a counterintuitive pick. Many investors will object due to moral reservations about the company's main product (cigarettes). Others will express worries about lawsuit costs or money-losing investments in products such as JUUL and marijuana producer Cronos Group.
However, amid these legitimate concerns, the stock has seen a decades-long history of dividend and stock price growth. The current annual dividend of $3.36 per share has increased every year since 2010.
Today, the dividend yield stands at about 7.9%. If this rate were maintained, it would approximately double the value of one's investment every nine years on dividends alone.
Moreover, despite a price drop of about 45% over the last three years, the stock price increased by approximately 110% in the previous 10 years. Furthermore, investors can buy this stock at a low valuation. Currently, it trades at a forward price-to-earnings (P/E) ratio of around 9.8.
To be sure, the struggles continue. Earnings rose by just 0.9% year over year in the most recent quarter. The dividend payout ratio, the percentage of net income distributed as dividends, stands at about 78.5%. This could give investors pause.
However, Altria grew for decades despite declines in total smokers. Moreover, its Cronos investment could breathe new life into Altria as it becomes more of a cannabis stock.
2. Innovative Industrial Properties: A REIT benefitting from cannabis
Innovative Industrial is a unique kind of real estate investment trust (REIT). Instead of investing in office buildings or apartments, it owns properties explicitly designed for the growing of cannabis products.
This is ideal for two reasons. One, it is a profitable segue into what should remain a high-growth industry for years to come. Second, because it does not grow cannabis, it does not face Schedule I restrictions that hamper non-hemp marijuana producers. Since hemp, a form of cannabis, became legal to grow in the U.S. in 2018, this means Innovative Industrial can operate in all 50 states.
Indeed, the company's prospects appear bright. In the most recent quarter, revenue increased by 210%. This took adjusted funds from operations for the quarter to $1.12 per diluted share, a 236% increase year over year.
At a forward P/E ratio of 28.5, the valuation appears low considering the massive growth. Additionally, the REIT status requires that it pay a dividend. Thanks to the recent increase, Innovative Industrial now pays shareholders $4.24 per share annually. This amounts to a yield of 4.3%. The company's board has also approved at least one dividend increase per year since payouts began in 2017. As long as this massive industry growth continues, this REIT should enjoy substantial dividend and stock price increases for the foreseeable future.
3. Verizon: Dividend payout ratio is quite manageable
Challenging business conditions have long squeezed Verizon. A highly competitive wireless market coupled with the massive cost of a nationwide 5G buildout has long weighed on the company.
This has helped lead to a mixed picture on the income front. For the previous quarter, earnings increased by 18.8% from the same quarter last year. However, over six months, net income for the first half of 2020 fell by 1.2% compared to the same period in 2019. Nonetheless, amid modest profit growth, Verizon stock has increased by around 117% over the last 10 years.
However, through this struggle, Verizon pays a dividend of $2.46 per share annually, a 4.3% yield. The payout has increased every year since 2007.
Verizon stock trades at about 11.8 times forward earnings. Admittedly, this is a higher valuation and a lower payout yield than AT&T. However, AT&T's payout ratio is higher than Verizon's, which is currently about 53.3%. Furthermore, a smaller long-term debt burden and a more exclusive focus on 5G arguably makes Verizon the safer choice for IRA investors.
Investors also need to remember that Verizon is one of three nationwide companies offering 5G service. Verizon spent $9.85 billion in the last six months alone on capital expenditures. The high cost of such a buildout should discourage additional 5G competitors.
