You can populate a Roth IRA with a wide range of financial assets, including individual stocks, CDs, mutual funds, ETFs, bonds and even cash. Since capital gains and investment income aren't taxed within these retirement vehicles, it pays to choose assets that are likely to appreciate and/or pay growing dividends over a long stretch of time.
The ideal Roth IRA stock
For less risk-hungry investors, the perfect Roth IRA stock would sport an above-average dividend and a long track record of annual raises. Ideally, such a company would also have a decent shot at market-beating growth over time. And finally, its business would have the strength and predictability to withstand the many recessions and downturns that are likely to occur before it will finally be time to start selling shares in retirement.
The stock that I think meets all of these requirements right now is Procter & Gamble (PG -0.98%).
Start with its dividend. Income investors may be turned off by P&G's elevated payout ratio (a whopping 85% of earnings are currently spoken for, compared to the market average of around 50%), but that's nothing to be alarmed about. Foreign currency swings are responsible for most of the earnings decline that P&G has suffered lately, which makes cash flow a much better metric to watch.
P&G is producing a record amount of cash these days ($4 billion last quarter alone), which means it's in no danger of ending its amazing 59-year streak of annual dividend raises. With its hefty 3.2% yield and ample cash coverage, this is one of the market's strongest dividends.
But what about growth? Here again, P&G seems like a dud if you go by the latest operating trends. Organic sales ticked up by just 2% last year as volume declined in most of its product segments.
Yet that sluggish pace could shift into high gear now that the company has finished chopping 100 brands out of its portfolio to focus on only the fastest-growing, most profitable ones (like Tide, Pampers, Gillette, and Gain). Management estimates that the new P&G will grow by 1 extra percentage point per year and produce 2 percentage points of higher profitability over the long run.
The third pillar of support for a P&G investment is its capital returns. Funded by improving cash flows, and by the billions of dollars raised through sales of underperforming brands like Duracell, executives have the ammunition to deliver their planned $70 billion to shareholders over the next three years. Most of that cash, which accounts for one-third of the current market capitalization, will be dedicated to stock buybacks that promise to lift per-share profit while boosting investors' total returns.
Fund your future
Predicting how a business will look in a year is difficult enough -- and that challenge becomes much harder when you extend your view to 10, 20, or 30 years down the road. However, don't let uncertainty prevent you from investing at least a portion of your Roth IRA contributions in individual stocks, like P&G, that might just end up funding a big piece of your retirement