As investors get closer to retirement, it can be a smart idea to shift their portfolios away from high-flying growth stocks and instead look for companies with strong competitive advantages, solid long-term growth prospects, and a proclivity to shower their investors with dividends.
We asked three of our analysts to share a stock that they think is a good choice for an investors that will be retiring in the not too distant future. Read on to see which stocks they highlighted.
Tyler Crowe: It never sounds "smart" to invest in large, stable companies that continuously churn out boring earnings results and a dividend check every quarter. After all, everyone sounds like a genius when buying a dividend aristocrat. In reality, though, these are exactly the kind of smart investments that will help provide you with that extra income in retirement (and build a decent nest egg while heading into retirement). That's why it's a smart time to buy ExxonMobil (NYSE:XOM).
To some, buying ExxonMobil right now while the oil market is in the doldrums is a dumb idea. With prices this low, the company can barely muster big profits. If you think about it, though, this makes now one of the most opportune times to buy the company. With over a century under its belt of dealing with a sometimes violent commodity cycle, ExxonMobil's management knows how to preserve the company in a downturn while preparing for the rebound, all while paying investors stable dividend checks. It has the best balance sheet in the business and has the wherewithal to invest through the cycle. So you can sleep easy knowing that management will take care of you even in the down times.
At the same time, shares of ExxonMobil are selling at a decent discount to any reasonable measure of their true worth. At less than 2 times tangible book value -- a better way to evaluate a cyclical company than price-to-earnings -- shares of ExxonMobil haven't been this cheap since the 1980s. It may not sound smart today, but when the market for oil and gas turns and ExxonMobil keeps paying out those dividend checks, you'll be happy in retirement that you made an investment in ExxonMobil.
Brian Feroldi: One smart way that investors can bulk up their future income is by purchasing stocks in companies that stand a good chance at significantly increasing both their earnings and dividend payments over time. One company that I think fits the bill nicely is the global payment giant Visa (NYSE:V), positioned for continued growth as the world continues to shift toward electronic payments.
The company's recent results confirmed that the payment shift is still well under way -- volume growth on a constant currency basis was up 12% last quarter to $1.3 trillion (yes, trillion), and adjusted net income per share jumped 10%. That's a solid result for a company as large as Visa, and there are plenty of reasons to expect that growth will continue. Visa is spending aggressively to build out its presence in China, and it's in the process of reacquiring its European business. It also has been winning more than its fair share of new business stateside, as evidenced by its recent win to add Costco as a major new customer later this year.
Add it all up, and I think that Visa stands a good chance of meaningfully growing its revenue and profits each year for decades to come.
Visa's small dividend yield of only 0.8% isn't likely to get your heart racing, but investors should know that Visa has been substantially increasing its payout for years, and its yield is only small because its stock price is up so much. Visa has increased its dividend payment by 33% annualized over the past five years, and that trend should continue, as its current payout only consumes about 18% of its free cash flow. That could turn Visa into a dividend juggernaut 10 years from now, which I think its a great stock for future retirees to buy today.
Daniel Miller: There's no question that Emerson Electric Co. (NYSE:EMR) has had a rough go of it while facing significant headwinds in its oil and gas businesses, as have many companies facing the same situation. Further, Emerson's stock price has been very volatile over the past five years and is down nearly 20% over the past five years.
However, for investors eyeing retirement, the company still makes for an intriguing addition to many portfolios because of its cash flow and the value it distributes back to its shareholders.
Emerson has generated more than $19 billion cash flow since 2010, and that number should continue to increase in the years ahead as the company relentlessly focuses on restructuring and asset divestitures. Further, the current down cycle represents a good buying point for investors who can wait out the bumpy ride into better times.
Despite the current situation that will continue to be rocky throughout 2016, as its oil and gas businesses continue to struggle in all probability, the company has made it clear that it will return value to shareholders at a high rate. In fact, according to Morningstar.com, Emerson has returned more than 80% of its free cash flow through dividends and share buybacks over the past decade. That should be music to retirees' ears, and at these prices Emerson could be a great addition to a portfolio looking for companies with upside and a history of returning value to shareholders.