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2 Top Stocks for Retirees

By Lawrence Rothman, CFA - Updated Mar 22, 2021 at 11:56AM

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These companies can provide investors with both income and stability.

If you have retired, or if you're about to, you can celebrate the end of your working days. After that, you can turn to your nest egg, ensuring that you're mentally and financially ready to move on to the next phase of your life.

Some capital appreciation might still be necessary in retirement, even if you're not comfortable with the timeframe that's normally required for high-reward, high-risk businesses. Retirees typically look for more stable, income-producing investments. Here are two stocks that meet these criteria.

A man sitting at a desk and looking at a piece of paper.

Image source: Getty Images.

Johnson & Johnson

Johnson & Johnson (JNJ 1.27%), which was founded more than 130 years ago, organizes itself into three business segments. The largest, at 55% of total sales last year, is pharmaceuticals. This unit sells patent-protected treatments for conditions like arthritis, diabetes, and cancer, and it still delivers fair growth. Last year, the segment's sales increased by better than 8% to $45.6 billion.

But the company also has strong businesses in medical devices (used in areas such as surgeries and orthopedics), and consumer (personal care and over-the-counter medications sold under well-known brands like Band-Aid, Tylenol, Aveeno, and Motrin). As you'd hope for such a venerable company, it commands a strong share in each market.

Johnson & Johnson also generates nearly half of its sales from international markets, a diversification of income that will benefit the company as countries recover at different rates from the novel coronavirus pandemic and its economic fallout. While COVID-19 took a toll on Johnson & Johnson's results in 2020 -- particularly on its medical device business, as doctors and patients canceled or postponed procedures -- its adjusted sales still rose by 1.5%.

Meanwhile, as restrictions were eased, Johnson & Johnson built some momentum in the second half of 2020 after sales fell by nearly 9% in the second quarter, and it expects nearly 9% sales growth this year. That forecast doesn't count any benefit from its recently approved COVID-19 vaccine.

If you're looking for dividends, Johnson & Johnson, which has a 58-year streak of raising payments, is a Dividend King, or a company that has increased payments for at least half a century. It certainly has the free cash flow to support it -- over the past several years, free cash flow has been about $20 billion annually, about double what the company has paid out in dividends. At Monday morning's share price, Johnson & Johnson offers a 2.5% dividend yield.

Target

Target (TGT -0.48%) traces its roots back almost 120 years. It breaks its business down into five different categories that are fairly close in size (apparel, beauty and household essentials, food and beverage, hardlines, and home furnishings), and this broad mix keeps shoppers coming for everything from groceries to furniture. The retailer continues to thrive by forming partnerships that allow it to exclusively offer products from appealing designers, and has developed a number of popular in-house brands.

Offering compelling merchandise is only part of the story, however. Target also continues to invest in technology that provides its customers with multiple ways to order and receive their goods, while shrinking the time it takes for people to get them. This includes order pickup (online order, pickup at the store within an hour) and drive-up (an employee delivers the ordered merchandise to the customer's car). The ability to offer its customers a way to shop during the pandemic was fortuitous, but longer-term, it has helped Target fend off online rivals, notably Amazon.

While it was able to stay open during the pandemic, that's certainly not the only reason Target did so well. It reaped the benefits of its omnichannel flexibility during its past fiscal year, which ended on Jan. 30. Same-store sales rose by 19.3%, with digital sales accounting for the majority of the growth.

Target has continued to grow earnings, which has translated into higher free cash flow. Its 2020 free cash flow was $7.9 billion, triple 2018's total. Last year, dividends were $1.3 billion, so the company comfortably made the payments. Although it's not quite a Dividend King yet, it has a 49-year streak going, so it is likely to join that illustrious group soon. At the current share price, investors get a yield of 1.5%.

Both Johnson & Johnson and Target are fine choices to hold in your retirement years. They are strong companies that not only pay good dividends but remain committed to raising them each year. Owning stocks like these, which you can count on to keep producing income for you, should help you sleep better at night.

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Stocks Mentioned

Target Corporation Stock Quote
Target Corporation
TGT
$154.61 (-0.48%) $0.75
Johnson & Johnson Stock Quote
Johnson & Johnson
JNJ
$179.22 (1.27%) $2.24

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