It's been a tough year for the investing community. Since the three major indexes hit their respective record-closing highs between mid-November and early January, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have plunged by as much as 19%, 24%, and 34%. In fact, the S&P 500 ended June with its worst first-half performance since 1970.
While short-term downtrends in the stock market can be unnerving, they can be especially scary for retirees looking to protect their nest egg while continuing to steadily grow their wealth and collect income. However, bear market declines don't have to be terrifying events for aged Americans. They can be opportunities for retirees to nab high-quality, profitable, and time-tested businesses at an extremely attractive price.
What follows are five perfect stocks retirees can confidently buy right now.
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NextEra Energy
The first stock that checks all the right boxes for retirees is electric utility NextEra Energy (NEE 1.36%). NextEra is the largest utility in the U.S. by market cap.
The beauty of electric utility stocks is their predictable demand and operating cash flow transparency. No matter how well or poorly the U.S. economy and stock market are performing, demand for electricity from homeowners and renters doesn't change much from one year to the next. This ability to accurately predict what it'll generate in annual cash flow is what allows NextEra to parse out a nearly 2% yield and allocate capital to new infrastructure projects without adversely affecting its profitability.
Speaking of projects, no electric utility has more capacity from solar or wind power than NextEra Energy. Although investing in renewable-energy projects isn't cheap, it's paying off handsomely for the company and its customers. Dramatically lowering its electricity generation costs has helped lift NextEra's compound annual growth rate to the high single digits in an industry known for low single-digit growth.
I'd be remiss if I didn't also mention that NextEra Energy is a Dividend Aristocrat. This fancy term is given to companies within the S&P 500 that have increased their base annual payout for at least 25 consecutive years.
Microsoft
A common misconception is that growth stocks are inherently risky. While certain growth stocks can be volatile, there are quite a few that can contribute in a positive way on multiple fronts for retirees. Tech kingpin Microsoft (MSFT 1.65%) is a perfect example.
What makes Microsoft such an impressive performer is its combination of cash-cow legacy segments and high-growth initiatives. For instance, Microsoft's legacy Windows segment isn't growing like it once did. It had a small resurgence during the pandemic as personal computer (PC) sales rose, but it's a generally slow-growth division. However, Windows remains the dominant global operating system for PCs, which means Microsoft is pocketing plenty of profit from selling its software.
On the other side of the coin, Microsoft is investing heavily in its cloud services across a myriad of operating segments. The fastest growing of these is Azure, which is the global No. 2 in cloud infrastructure service spending. On a constant-currency basis (i.e., excluding foreign currency movements), Azure delivered 46% year-over-year growth in Microsoft's June-ended quarter.
Retirees will collect a dividend, as well, with Microsoft. Even though its 0.9% yield might not whet your whistle like the other stocks on this list, the $18.5 billion Microsoft devotes to paying its annual dividend is among the largest in the world for a public company.
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Enterprise Products Partners
A third perfect stock for retirees to scoop up right now is oil and gas company Enterprise Products Partners (EPD -0.31%). Enterprise Product's 7.1% dividend yield is the highest on this list.
Now that I have your attention, let me begin by allaying your concerns about investing in an oil stock. While the demand collapse for oil and gas that occurred in 2020 due to the coronavirus crash is still fresh in the minds of investors, Enterprise Products Partners escaped virtually all of this drama. That's because it's a midstream provider, with over 50,000 miles of transmission pipeline, 14 billion cubic feet of natural gas storage capacity, and two dozen natural gas processing facilities.
In simple terms, Enterprise Products Partners is an energy complex middleman. Midstream oil and gas companies almost always rely on fixed-fee or volume-based contracts, which provide highly predictable, transparent cash flow. It's this transparency that allows the company to outlay capital for new infrastructure and acquisitions without negatively impacting its profits or supercharged dividend, which has grown in each of the past 23 years.
If you need additional proof that Enterprise Products Partners' payout is rock solid, consider this: Even during the worst of the pandemic in 2020, its distribution coverage ratio (DCR) didn't fall below 1.6. The DCR describes the amount of distributable cash flow generated from operations relative to what's paid out to shareholders. A DCR of 1 or lower would imply an unsustainable payout.
UnitedHealth Group
A fourth ideal stock for retirees to confidently buy right now is diversified healthcare company UnitedHealth Group (UNH -1.03%). UnitedHealth is currently doling out a 1.2% yield, but has grown its quarterly payout by 1,220% since May 2010. This 1.2% yield is a reflection of just how much the company's stock has outperformed over the past 12 years. In fact, UnitedHealth has produced a positive total return for its shareholders, including dividends, in 18 of the past 20 years.
The great thing about healthcare stocks is they're highly defensive. Patients will always need prescription drugs, medical devices, and healthcare services, which sets a base level of demand that healthcare companies can expect. In short, people don't stop getting sick just because the stock market or U.S. economy had a bad day.
UnitedHealth's foundational segment has long been its insurance operations. While insurers will inevitably contend with catastrophes, they often sport incredible pricing power in any economic environment. Since catastrophe losses are inevitable, they can use a loss event, or the likelihood of one occurring in the future, as the impetus to up premiums.
However, healthcare services subsidiary Optum has become UnitedHealth's core growth driver. Optum is composed of three segments that cover everything from pharmacy services to software and data analytics provided to healthcare organizations. Optum's superior growth rate is what can propel UnitedHealth Group higher.
Berkshire Hathaway
The fifth and final perfect stock retirees can confidently buy right now is conglomerate Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%). Although Berkshire doesn't pay a dividend to its shareholders, its Class A shares (BRK.A) have averaged a 20.1% return over the previous 57 years. That's a not-too-shabby aggregate return of 3,641,613%, for those of you keeping score at home.
The first reason to buy Berkshire Hathaway without any worries is simple: Billionaire investing genius Warren Buffett is the CEO. Buffett has a knack for picking out winning investments and making earnings-accretive acquisitions over time. He's demonstrated over many decades how valuable time can be as an ally.
Berkshire Hathaway's investment portfolio is also packed with dividend stocks. Even though Buffett's company doesn't pay dividends, the Oracle of Omaha is set to collect more than $6 billion in passive income over the next 12 months, much of which will come from a small handful of companies. Dividend stocks are almost always profitable and time tested. Most importantly, they have a rich history of outperforming their non-dividend-paying peers.
Investors should appreciate Buffett's focus on cyclical stocks as well. A cyclical business ebbs and flows with the U.S. and global economy. You might be thinking, "Why would I be happy that my stock is struggling when a recession arrives?" The answer is that recessions are impossible to time, but usually last only a couple of quarters. By comparison, economic expansions are measured in years. Buffett is playing a numbers game with Berkshire's portfolio that strongly favors patient investors (and his performance since 1965 demonstrates it).
