The type of account being used to hold an investment doesn't change that stock's overall performance. But it can affect your taxes. Individual retirement accounts (IRAs) defer taxes on dividends and capital gains, and in the case of Roth IRAs, withdrawals are typically tax-free. If you're looking at all your investments inside and outside of retirement accounts holistically, these factors should impact which names you hold in an IRA and which ones you don't.
To that end, investors looking to get the most out of their tax-deferred accounts may want to consider positions in Consolidated Edison (ED -0.69%), Microsoft (MSFT 2.52%), and Amgen (AMGN 0.16%). Here's a closer look at what each one offers, and why they work so well in most growth-minded IRAs.
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Consolidated Edison pays a big dividend
If you want your portfolio to produce reliable income but don't actually need to live on that income as it's produced, retirement accounts are great places to hold high-yield dividend stocks.
Most dividends are taxed at capital gains rates; some are even taxed at higher personal income rates. When those dividend-paying stocks are held in an IRA, though, there is no annual tax bill. Rather, taxes are paid as distributions from the account are made, which can be years or even decades down the road. That gives you time to do something constructive with the money -- like reinvesting it to compound growth -- which would otherwise be passed along to the IRS every year.
One high-yield stock well suited for long-term IRA positions is utility name Consolidated Edison. It's presently yielding 4.1%, and better yet, the company has raised its dividend every year for 46 consecutive years. Shareholders who have been lucky enough to hold ConEd stock in a retirement account anywhere near that long may not have cared about the tax savings at first. However, they're avoiding considerable tax liabilities today.
The utility business is perfectly suited for reliable income and dividend growth, as people will always need electricity or heat.
Those who follow Consolidated Edison closely may know that it has struggled to deliver electricity to many customers in New York of late. Tropical Storm Isaias did some damage earlier this month, and the area has suffered from a heat wave that has prodded unprecedented use of air conditioning.
It's embarrassing to be sure. But it's not a long-term problem. By May of this year, ConEd was already planning for the region's summertime swoon. Uncontrollable circumstances made things tough, but the company should soon be able to put those challenges in the past.
Microsoft offers reliable growth
Most people will use their IRAs as vehicles for long-term growth, as opposed to short-term gains. But given that annual contributions to a retirement account are capped no matter the type -- 401(k), Roth, SEP, etc. -- an IRA isn't a place to take big chances on stocks that may or may not make progress.
Moreover, investment losses on positions held in an IRA can't be used as tax deductions, underscoring the idea that retirement accounts aren't the ideal place to swing for the fences. As such, reliable growth companies make the best use of an IRA's attributes.
Microsoft is a prime example of such a stock. It's anything but cheap, valued at more than 30 times its trailing as well as its projected fiscal 2021 earnings. It also isn't a dividend powerhouse. It yields a bit less than 1% right now and has never paid out like ConEd historically has. Microsoft still shines where it counts, though, and that's on the growth consistency front.
Microsoft's revenue has risen at a compound annual growth rate (CAGR) of nearly 9% over the past 10 years. Operating income has grown at an average of more than 8% per year for the same stretch. Some years have been better than others, but the software giant's results have been impressively steady. Any lulls in growth for either measure were short-lived; Microsoft recovers quickly, and recovers well. For a huge company like Microsoft with already-tough comparisons, that's impressive.
Much of that consistent success is the result of being a leader in the right sector...technology. The organization's sheer size is another key driver of its consistency. Microsoft has also started to think and act like a start-up for other start-ups, setting the stage for continued growth.
Amgen can adapt
Finally, add Amgen to your list of great stocks for your IRA.
It has many of the ideal qualities exhibited by Microsoft and Consolidated Edison. It's a decent dividend payer, currently yielding 2.7% (which would be tax-deferred in a retirement account). Amgen has a solid growth track record too, however, even if its ebbs and flows are measured in years. The company's top line has grown at a CAGR of nearly 5% for the past ten years, and earnings per share rose at a CAGR of 11%. Analysts expect 7% revenue growth and 6% adjusted EPS growth in 2020, despite all the hurdles created by the coronavirus.
That long-term progress indirectly illustrates Amgen's most compelling quality to an IRA owner: adaptability over time.
While pharmaceutical know-how changes over time and patent protection on drugs eventually expires, the pharma industry has gotten very good at adapting and replenishing drug-development pipelines. And what these companies can't make on their own, they acquire.
For instance, last year, Amgen acquired the rights to market plaque-psoriasis and psoriatic-arthritis drug Otezla and took a stake in BeiGene to expand its cancer drug portfolio in China. The company also has about two dozen phase 3 trials under way, any of which could yield a new revenue opportunity in the foreseeable future. Two of those trials are looking to expand the uses of an already-approved multiple myeloma treatment, Kyprolis.
The key point is that Amgen can constantly adapt to remain relevant. It's a decent income producer in the interim.
