The bear market of 2022 will likely go down in history as one of the more brutal years for investors. The Nasdaq Composite index has dropped by around 30% since January, and a few growth names fell by more than 90% from their peak.
This decline devastated some investors who had hoped to retire soon, and many have reevaluated their appetites for risk. But for retirement investors who still want market exposure, stocks such as Microsoft (MSFT +3.64%), Cisco Systems (CSCO +0.16%), and International Business Machines (IBM +3.06%) should lower the risks while increasing the potential for gains.
You can trust your money with this technology titan
NASDAQ: MSFT
Key Data Points
Justin Pope (Microsoft): From its founding in 1975, Microsoft has grown into one of the world's largest companies, a technology conglomerate with a $1.8 trillion market cap today. Technology companies can have difficulty staying relevant in an industry where there's always new competition emerging. However, Microsoft has successfully stayed with the times. Microsoft's Windows operating software, its legacy business, remains a powerhouse with a 75% market share of the global desktop computer market. But its cloud platform Azure, one of its most important segments today, didn't launch until 2010.
Strong execution has fueled decades of sales and earnings growth, which should continue. Analysts believe the company can grow its earnings per share (EPS) by an average of 11% annually over the next three to five years. Stock prices can be irrational in the short term, but growing profits eventually shine through. Investors can feel good about Microsoft's long-term stock performance if it keeps increasing earnings as it has.
MSFT Revenue (TTM) data by YCharts
But retirement isn't just about growing your wealth; you want some passive income, too, and Microsoft checks that box. The dividend yield isn't the highest at 1.1%, but the company has paid and raised its dividend for 20 consecutive years. The dividend's 26% payout ratio means that the dividend is very well funded and should grow over the coming years. The stock is a double whammy of growth and dividends that can play a vital role in any retiree's long-term investment strategy. Just as importantly, holding the stock won't keep you up at night, letting you enjoy your golden years.
Cisco is an excellent proxy for the S&P 500
NASDAQ: CSCO
Key Data Points
Jake Lerch (Cisco Systems): Stability can be hard to find in the technology sector; price volatility is rampant. What's more, many tech companies are unprofitable. Frequently, they promise investors that current growth with lead to profitability -- someday. But, if you're an investor looking for stability, you want to see profits today, not in the distant future. And if that's what you're after, Cisco is a tech name worth considering.
Cisco is most widely known as the maker of communications and internet hardware. However, the company has expanded its business to include higher-growth areas such as data center management, cloud computing, and cybersecurity.
SPY Total Return Level data by YCharts
As the chart above shows, Cisco's price performance closely tracks the S&P 500. Over the last 10 years, the total returns for Cisco and the S&P 500 are within 7 percentage points. What's more, Cisco's dividend yield (3.1%) is higher than what you'd get from the SPDR S&P 500 ETF Trust (1.2%), which helps investors generate income from their portfolio.
Moreover, Cisco has a lower price-to-earnings (P/E) ratio of 13.9 on a forward-earnings basis. This means Cisco is cheaper on a relative basis than most technology stocks. In fact, its P/E ratio is more typical of an industrial stock -- one tied to the overall economy's health. And with the U.S. economy likely to regain momentum after a sluggish 2022, Cisco is a stock worth owning for its steadiness and consistent returns.
This venerable tech stalwart has become the dividend stock of the cloud
NYSE: IBM
Key Data Points
Will Healy (IBM): Admittedly, IBM stock gave investors few reasons to celebrate in the 2010s. Growth ground to a halt in most of its legacy businesses, and the stock lost about half its value between its peak in 2013 and a bear market bottom in March 2020.
However, in 2019, IBM rolled the dice on a bold, cloud-driven transformation, spending $34 billion to acquire Red Hat. With that move, the head of IBM's cloud segment, Arvind Krishna, became IBM's CEO less than a year later. Under his leadership, IBM has become increasingly recognized as a leader in the hybrid cloud, a product that allows for seamless interaction between private and public clouds.
Also, since becoming CEO, Krishna has acquired more than 25 cloud and artificial intelligence companies and spun off its managed infrastructure business into a separate company now known as Kyndryl. These improvements have helped IBM stock rise by more than 45% during Krishna's tenure.
But how does that help retirement investors?
For one, IBM grew its revenue by 8% in the first nine months of 2022 versus the same period last year. This is a notable improvement after years of flat revenue growth.
Second, free cash flows have traditionally been one of the reasons to buy IBM stock, and a vibrant cloud business should bolster that cash position. The company forecasts $10 billion in free cash flow in 2022, up from $6.5 billion in 2021 when it faced divestment costs from Kyndryl spinoff.
Third, retirees can profit from a payout that makes it the dividend stock of the cloud. IBM is on track to spend $6 billion on dividend costs this year, meaning its free cash flow will easily fund its payout. Also, its yearly dividend of $6.60 per share yields 4.5%, well above the 1.7% S&P 500 average cash yield.
IBM's payout has also risen for 27 straight years, making it a Dividend Aristocrat. And since Aristocrats tend to keep that status when possible, the dividend increases should continue.
In the end, these attributes will likely keep retirees secure. Not only should the stock provide income for its shareholders, but a robust cloud business will also increase the likelihood of stock gains over time.
