Because retirees can have very different investment goals than workers, the companies owned in your portfolio before retirement may not be the best companies to own afterwards. After all, it's easier to look beyond the market's inevitable drops when you have a paycheck coming in than it is when you're relying on your savings for retirement income.
With that in mind, we asked some of our top contributors to weigh in with their picks. Here are three companies that they think make sense for retirees, and why.
Todd Campbell: When building a portfolio in retirement, it can help to focus primarily on income-generating stocks with lower volatility thanks to popular brands. Johnson & Johnson (NYSE:JNJ), the maker of big-name consumer goods such as Listerine and Band-Aid, is also a major player in drug development and medical devices. That means that Johnson & Johnson is perfectly positioned to profit as America gets increasingly older.
Last year, Johnson & Johnson sold $32 billion worth of medicine, and that amount should grow over time, thanks to a robust pipeline of drugs under development to treat various diseases, including cancer, depression, and arthritis pain. Johnson & Johnson also racked up more than $27 billion in medical-device sales last year by selling products for the treatment of conditions such as cardiovascular disease and diabetes. With 10,000 Americans turning 65 every day through 2030, there's likely to be quite a tailwind of demand for these medical devices.
Moreover, the potential growth tied to rising drug and medical-device sales should provide Johnson & Johnson with the necessary firepower to continue to ship back money to investors via dividends. That means that Johnson & Johnson's dividend yield, which is currently 3.31%, should remain solid.
Still need more convincing? Consider this final point. In the heart of the Great Recession, shares in Johnson & Johnson fell by just 7.7% in 2008, and that was about 30% better than the S&P 500 that year.
Andres Cardenal: The Consumer Discretionary Select Sector SPDR ETF (NYSEMKT:XLY) is an exchange-traded fund providing exposure to nearly 90 companies in the consumer-discretionary sector. This includes businesses such as retail, entertainment, restaurants, automobile manufacturers, and apparel goods, among many others.
Demand in these industries tends to fluctuate substantially with economic conditions, but diversification provides safety and stability for investors in the ETF. Besides, the portfolio includes many of the most-valuable and recognized brands around, including names such as Amazon, Walt Disney, McDonald's, Starbucks, and Nike.
Betting on the U.S. consumer has historically been a remarkably profitable investment, especially when selecting companies with strong brands and solid competitive advantages. Besides, many of the companies in the ETF portfolio still have a lot of room to grow via product innovation and international expansion.
The ETF has a gross expense ratio of 0.14%, so investors are getting exposure to a diversified basket of stocks for a conveniently low cost. The dividend yield stands at 1.34% at current prices. While this is not particularly high, many of the companies in the portfolio typically raise dividends on a regular basis, so investors in the ETF have solid reasons to expect growing dividends over time.
Tyler Crowe: One stock that stands out as a great investment for those in retirement is Magellan Midstream Partners (NYSE:MMP). Unlike many other companies in the energy space that vacillate with the price of oil, Magellan's business of transporting and storing crude oil and refined petroleum products is mostly done under long-term, fixed-fee contracts. Therefore, the company owns a steady stream of cash from which it can pay a generous distribution that not only yields 4.6% today, but also has established a strong track record of routinely increasing its payout to investors over time.
What's more, Magellan's management has set some pretty conservative payout targets compared to other pipeline companies. This gives the company some extra cash to invest in growth projects that will lead to higher distributions in the future. While management doesn't give payout guidance several years out, its development projects will provide additional cash flows for several years in the future that should ultimately lead to strong payout growth.
It may sound scary for investors who are approaching retirement to invest in a company tied to the oil and gas industry right now, but Magellan isn't a typical company for this space. It's toll-booth-style revenue stream, and penchant for rewarding its investors with generous payouts, could make Magellan a great pickup for an income portfolio.