Given that three $500 million-plus jackpots have been won in the past three years, it's no wonder that millions of Americans play the Powerball. That said, some basic math shows that it's a bad investment, and nearly every ticket has a negative value for the buyer. Your odds of winning the jackpot are 1 in 175,223,510. To get your head around that, imagine that the entire U.S. population -- in every multimillion-person city, every sprawling suburb, and each of the countless small towns -- played the Powerball. There would one or two winners. Even to win just $4, the odds are worse than 1 in 55.
With that in mind, we asked our Motley Fool writers to name three investments they think are better than a Powerball ticket. Read on for their answers.
When the house has a big edge, I'm a big fan of betting on the house. With the lottery, your ticket to fortune lies in shares of lottery operator International Game Technology (NYSE: IGT), which is one of the companies behind casino slot machines and video lottery terminals. Several states across the country have contracted with International Game Technology to run video lottery programs, which in many instances resemble electronic scratch-off tickets that provide potential instant wins to players. Between those contracts and its business in traditional casinos, International Game Technology has helped both private businesses and government entities profit from the inherent advantages in machine-based gaming.
Shareholders in International Game Technology may not hit a multimillion-dollar jackpot, but the stock pays a 2.5% dividend yield produced from the pockets of the millions of lottery losers. Challenging economic conditions in certain areas that specialize in gaming have held back IGT's growth recently, but many expect the company to rebound as the U.S. economy improves. So long as you're comfortable profiting from the poor decisions of those who frequently play the lottery and other high-risk games, International Game Technology offers an opportunity to share in the gains that come at the expense of gamblers.
It's hard to think of an investment that isn't better than a $2 Powerball ticket. The U.S. Postal Service's Forever stamps make a fine long-term holding, as they can help you keep in touch with loved ones and they never lose value, regardless of inflation or market conditions! For a three- to five-year investment, consider a nice pair of socks. And for you short-term investors, I highly recommend a burrito or a box of donuts. Any of those "investments" is virtually guaranteed to pay off more than a Powerball ticket.
But for a stock investment that’s extremely likely to pay off far more than a lottery ticket, consider Waste Management (NYSE: WM). It came to mind as I imagined the many landfills and recycling centers filling up with discarded, non-winning lottery tickets. Waste Management is the 800-pound gorilla in the garbage industry, and it offers a dividend that recently yielded a sizable 2.9%, too. And given the payout ratio of 55%, there’s plenty of room for dividend increases in future years.
Waste Management’s business and much of its cash flow is reliable, as we will always have trash to get rid of. Some of its results will fluctuate a bit over time (such as its recycling operations, which are affected by the changing prices of metals), but it remains a solid long-term prospect. It generates more than a billion dollars in annual free cash flow, and its net profit margins have been rising, recently topping a hefty 9%. Waste Management has been cutting costs recently, too, while generally maintaining or increasing its prices.
I'd say this stock's odds of paying off look a little better than 1 in 175 million.
One of the riskiest investments you can make in the stock market is a biotech company that has no approved drugs, brings in little revenue, and blows through cash like it's going out of style. And yet you could throw a dart at a list of such biotechs, buy shares of the company you hit, and still have a better shot at success than you would buying a Powerball ticket.
I didn't literally throw a dart, but I did randomly pick a biotech meeting all of those criteria -- Peregrine Pharmaceuticals (NASDAQ: PPHM). Peregrine has two drugs in its pipeline, neither of which is approved by the FDA. It lost $38 million in the nine months ending Jan. 31. Mind you, I don't recommend buying shares of Peregrine or selecting any stock (biotech or otherwise) at random. However, Peregrine stock still has a much higher chance of paying off than a lottery ticket.
Here's a much better bet, though: Find the stock of a company that consistently delivers for its shareholders, buy shares, and be patient. If you wanted to stick with biotech stocks, Gilead Sciences (NASDAQ: GILD) would be a good choice. The company has a commanding presence in the multibillion-dollar HIV/AIDS and hepatitis C drug markets. Gilead has been consistently profitable for years, and it even pays a dividend -- something few biotechs do. That's the kind of investment that can be truly rewarding over the long run.
No matter what your income level is, contributing to a retirement savings account is an infinitely better investment than a Powerball ticket. Retirement savings accounts such as 401(k)s and IRAs allow your investments to grow tax-free and thereby compound at a far higher rate than they could in a standard brokerage account.
In addition to letting your savings grow faster, traditional 401(k)s and IRAs grant you an up-front tax deduction on your contributions. If you're covered by a retirement plan at work, there are income limits to the tax deduction for contributing to an IRA. If you aren’t covered by a retirement plan at work, then there is no income limit on your tax deduction. There are no income limits on the tax deduction you get from contributing to a 401(k).
Those in the lowest 20% by income level have an added incentive to contribute to a retirement account because of the retirement savers tax credit. Low-income taxpayers who are not full-time students can get a tax credit of 10% to 20% of up to $2,000 in retirement savings ($4,000 for those married filing jointly). However, there are income limits, so take note:
Whether you can take the retirement savers tax credit or not, you're much better off putting your money into a retirement savings account than buying a Powerball ticket.