The beauty of investing is that if you start early enough and buy shares of companies with decent long-term prospects, compounding can do most of the heavy lifting when it comes to building your nest egg. Indeed, even a person of modest means can reach millionaire status by retirement by picking solid companies and letting compounding work its magic over time.
The key is to find businesses with decent prospects trading at a reasonable enough valuation that you as a new investor have a chance to share in the benefits of that growth. It's a balancing act, to be sure. Many of the hot growth businesses trade as though their growth will continue unabated forever, while many of the companies with cheap valuations don't have particularly strong growth prospects. With that balance in mind, here's why investing in these stocks now could make you a millionaire retiree.
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A business that benefits from the aging population
America's population is aging rapidly, with the number of people 65 or older expected to exceed the number of children by 2034. As a general rule, the older you are, the more healthcare services you need and the more you're spending on them. That makes health insurance giant Anthem (ELV 1.11%) a company well positioned to benefit from that trend.
After all, under Obamacare mandates, insurers must spend at least 80% of the premiums they receive on medical costs. The higher the costs of serving its target population, the higher the premiums the company can collect while still meeting that requirement. With an older population generally requiring more healthcare services than a younger population, that demographic trend provides a built-in reason to believe Anthem's business can continue to grow.
From a valuation perspective, Anthem recently traded hands at around 11.5 times its trailing earnings, and those earnings are expected to grow around a 14.5% clip over the next five years. That's a reasonable price to pay for a company well positioned for what the future is likely to bring. Of course, there are risks attached as well. Primarily, if a fully socialized healthcare system were to be implemented in the United States, insurers like Anthem would find themselves out of business.
Still, it's in part because of that risk that Anthem trades in the stock market at a reasonable price today. It's also an example of why any well-designed asset allocation plan includes an aspect of diversification to protect against the loss of any one business or industry.
A company that can do well in tough times
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When times are tough, people may start to fall behind on their bills. When that happens, debt collectors like PRA Group (PRAA -3.67%) help them figure out how to get their obligations paid off. It's not a particularly glamorous business, but it is certainly a necessary one that stands to see an uptick in tough times.
On the flip side, it's often easier to borrow money in strong economic times. Indeed, the common refrain is that the best time to borrow money is when you don't need it. While boom times mean it's more likely that debtors will be able to pay, that fact that it's easier to borrow during those times also means more debt will likely be issued to marginal borrowers. That means that even when times are good, there will also likely be a need for collections agencies like PRA Group.
Thanks to a business model that should work in both good times and in bad ones, PRA Group has the potential to both survive the current reality and grow in the future. On average, analysts expect it to earn $2.94 per share in 2020 and $3.16 per share in 2021. In addition, it's expected to be able to increase its profitability by more than 30% annualized over the next five years. At a recent price around $40.85 per share, investors are paying less than 14 times anticipated 2020 earnings for that potential.
A technology titan that's rewarding its owners despite the current crisis
There's an old saying among investors that accounting profits are a matter of opinion, but dividends are a matter of fact. The unfortunate reality is that a lot of troubles can be temporarily papered over with aggressive accounting practices. Dividends, on the other hand, are much tougher to fake, since companies generally need to have cold, hard cash on hand to hand it out to their shareholders.
That makes Texas Instruments' (TXN 0.25%) recent 13% increase in its dividend worth paying attention to. In an era where dividend cuts are common because of the COVID pandemic, any dividend increase is appreciated, and a double-digit one is certainly worth paying attention to. That dividend increase brings its payout to $4.08 per share per year, which offers investors a respectable 3.0% yield at recent prices.
Texas Instruments has increased its dividend for 17 consecutive years, showcasing a decent commitment to rewarding shareholders for the risks they take by investing. Analysts are expecting it to be able to continue to grow its earnings by around 10% annualized over the next five years, which gives decent reason to believe that dividend growth can continue as well.
An integrated circuit company well known for its calculators, Texas Instruments has product lines that cross industries as diverse as education, industrial, automotive, and communications. That broad reach means that its fortunes aren't tied to one particular customer or product line, which also helps provide reason to believe its operations can be sustained virtually no matter what comes next.
Good businesses today with a decent path to tomorrow
Although Aetna, PRA Group, and Texas Instruments all operate in very different industries, they all have solid businesses today and decent paths to potential growth in the future. That combination makes them worthy of consideration as part of a portfolio designed to help you get to millionaire status by the time you retire.
[Editor's Note: Initial publication of this article listed last year's dividend information for Texas Instruments but has since been updated with more recent numbers from September 17, 2020.]
