If you're a twenty-something investor looking to retire early, a 20-year time horizon for investments is what you should look at. And you don't need a six-figure salary, or to start your own business, to build up an adequate nest egg.
With relatively minimal capital investment, a good investment can use the magic of time and compounding interest to bring investors closer to a $1 million portfolio. By investing just $1,000 per year each year for 20 years, investors even in relatively stable blue chip companies can build substantial wealth. Taking that investment approach 20 years ago with Costco Wholesale (COST -1.16%), NextEra Energy (NEE 0.92%), and AutoZone (AZO 0.03%) would have resulted in accounts with about $135,000, $166,000, and $187,000, respectively, today.
Image source: Getty Images.
1. Costco: Reliable and generous
Costco weathered the pandemic crisis well as an essential business. The stock gained 28% in 2020, but the total return for investors -- including a special $10-per-share dividend -- was 32%. Generous dividends add up over time. Over the last 20 years, the return from Costco shares was 735%. But the total return including dividends was over 1,000%.
If you haven't been invested in Costco over the last two decades, now is a good time to start a long-term position. Its share price has dropped about 12% so far in 2021, bringing the stock to a valuation based on a price-to-earnings (P/E) ratio that's as low as it's been over the course of the past two years. In that time, the company's revenue has increased almost 20%.
2. NextEra Energy: More than utility-like growth
A long-term portfolio should account for future trends, and the use of renewable energy is going to grow. NextEra Energy is in a good position for that growth with its NextEra Energy Resources subsidiary, the global leader in wind and solar power generation. It currently has a backlog of renewable projects that's larger than its existing portfolio, making it a growing business in a fast-growing sector.
Like Costco, NextEra Energy filters excess cash to shareholders in the form of dividends. The company is the parent of electric utilities Florida Power & Light and Gulf Power, giving it reliable, utility-supported cash flow. In its recent fourth-quarter earnings report, the company said it expects to continue to increase its annual dividend by about 10% through 2022.
But overall returns haven't been utility-like, as can be seen in a 10-year comparison to the Dow Jones Utility Average index.
NEE Total Return Level data by YCharts
Overall earnings growth isn't what you'd expect from a stodgy utility, and adjusted earnings per share increased 10.5% in 2020 versus the prior-year period. The company estimates between 6% and 8% annual earnings growth through 2023.
3. AutoZone: Under-the-radar winner
Of the stocks mentioned here, AutoZone may be the surprise winner. From an original $1,000 investment in 2001, combined with additional, annual $1,000 purchases, an investor would have more than $187,000. The stock's total return has risen an astounding 4,500% in that time.
AZO Total Return Level data by YCharts
AutoZone isn't a dividend payer, either. The auto parts retailer prefers to routinely repurchase shares with its substantial cash flow. In its recent conference call discussing earnings from its fiscal second quarter ending Feb. 13, 2021, AutoZone CFO Jamere Jackson said, "We now have $1 billion in cash on the balance sheet, of which approximately $830 million is excess cash."
Operating cash flow for the quarter was $356 million, up from approximately $200 million in the previous-year period. Cash is a metric that can't be manipulated. And the company continues to focus on it. Chairman, president, and CEO William Rhodes said on the call, "We will ultimately be measured by what our future cash flows look like three to five years from now." That's good news for investors looking ahead, too.
A reasonable strategy
To a young person, it might seem like 20 years is forever, but investing shouldn't be like looking for an overnight win. Planning for retirement is playing the long game. Adding $1,000 per year alone won't likely get a portfolio to the point where one can retire early. But doing it for several different stocks can add up, while also taking on below-average market risk.
These three stocks are all less volatile than the market itself, as measured by the beta coefficient -- a measure of volatility compared to the S&P 500 index. Applying that 20-year investment strategy to Costco, NextEra, and AutoZone shares would have netted an investor close to $500,000 today. That's a significant head start for a nest egg needed to retire early.
