Most people nearing retirement can't afford the risk of owning stocks that could decline significantly in the face of an economic downturn and never recover. That's why those nearing retirement should focus on safe stocks that can withstand difficult times. Doing so will enable them to preserve and grow their value over the long term.
Johnson & Johnson (JNJ 0.18%) and Coca-Cola (KO 0.20%) are two of the safest stocks in the world. They have elite balance sheets and generate very durable earnings and cash flows, enabling them to pay attractive and growing dividends. That means they should help preserve and increase the wealth of their investors in the future.
A very healthy company
Johnson & Johnson is one of the safest companies out there. Its AAA bond rating is tied for best in the world (and higher than the U.S. Government). It implies the healthcare giant has an unparalleled ability to meet its financial obligations. The $450 billion company (by market cap) ended the second quarter with only $17 billion of net debt ($29 billion in cash against $46 billion in debt).
The healthcare company generates tremendous cash flow. It produced $5.4 billion in free cash flow during the second quarter alone after investing $3.8 billion in research and development (R&D) to grow its business. That easily covered its dividend outlay ($3.1 billion). The company's ability to generate excess cash allows it to strengthen its already elite balance sheet and opportunistically repurchase shares ($2.5 billion already this year).
Johnson & Johnson's top-tier balance sheet gives it the financial firepower to make acquisitions to accelerate growth when opportunities arise. The company closed its latest deal last year, acquiring Abiomed for $16.6 billion in cash to enhance its ability to capitalize on the fast-growing medical technology sector.
The healthcare company's investments in R&D and acquisitions enable it to grow its durable sources of earnings and cash flow. That allows it to steadily increase its dividend. Johnson & Johnson has increased its shareholder payout for the last 61 consecutive years, including by 5.4% earlier this year. The company currently offers a 2.7% dividend yield (higher than the S&P 500's 1.5% payout). Given its financial strength, that payout should continue rising in the future. That makes it a great option for future retirees since it should provide them with an attractive and growing source of supplemental income in retirement.
The model of consistency
Coca-Cola also boasts of having an elite balance sheet. The beverage giant has A-rated credit, indicating it can meet its financial obligations in the toughest of times. The company ended last year with a 1.8 leverage ratio, comfortably below its 2.0-2.5 target range. Meanwhile, it ended the second quarter of this year with over $14.4 billion in cash and short-term investments.
Coca-Cola generates lots of cash. The beverage company expects to produce $11.4 billion in net cash from operating activities this year and $9.5 billion in free cash after funding capital expenses to grow its business. It returns most of that money to shareholders through dividends (its payout currently yields 3%) and share repurchases. It will also opportunistically acquire consumer-centric businesses to build and grow its capabilities.
The company's growth-related investments should continue increasing its earnings and cash flow. That will enable Coca-Cola to maintain its unstoppable streak of dividend growth. The company matched Johnson & Johnson with its 61st consecutive annual dividend increase earlier this year when it boosted the payout by another 4.6%. That steadily growing income stream makes Coca-Cola an ideal stock for those nearing or in retirement.
Super safe investments for retirement
Johnson & Johnson and Coca-Cola are two of the safest companies in the world. Their elite balance sheets make them financial fortresses that could weather any storm. In addition, they generate lots of durable cash flow, giving them money to invest in growing their businesses while paying steadily rising dividends. Those dividends can supply future retirees with some supplemental income to help support their golden years. These factors make them excellent stocks for those nearing or in retirement to buy and hold for years to come.
