When you're in your 50s, you've got a lot going for you. You're probably in your peak earnings years, and you've probably got enough time left before you plan to retire that you can deal with stock market volatility. To top it off, you're young enough that you should keep a substantial portion of your portfolio in stocks to assure your investments have a decent chance of lasting at least as long as you do.
Although you've got all that going for you, you're also deep enough in your career that a substantial investing mistake might take longer to recover from than you'd be able to comfortably navigate. As a result, while you'll want to be invested in stocks, you'll probably want to tailor your investments toward companies that have proven track records of rewarding their investors for the financial risks they're taking.
Three key factors to look for in your investments
Within that framework, there are three key characteristics you will want to look for in your investments: decent dividends, solid balance sheets, and reasonable valuations. While not a guarantee of investing success, working together, they can tilt the odds further in your favor. The following three stocks leach fit those critera, which means they deserve consideration for a slot in your portfolio.
- Dividends matter because they're both a direct reward for the financial risks you take in investing and because they're strong signals of what a company's management really thinks of its business prospects.
- A company's balance sheet matters because things don't always go as planned, and a solid balance sheet can give a company the flexibility it needs to survive the downturns and emerge stronger.
- Valuation is important because in the short run, the market is an emotional roller coaster. With a decent estimate of what a company is really worth, you can make smarter decisions on what to do when the market takes one of your investments on a wild run or a massive nosedive.
Three investments that meet those key factors
Investment No. 1: Ryder Systems (NYSE:R). Ryder is probably best known to the public as a transportation company, a member of an industry that's known to be highly competitive and generally low margin. While it's true that Ryder does have a "dedicated transportation solutions" division that moves products around, that segment represented only 13.5% of the company's operating revenue in its most recent quarter. The rest of its revenue was generated by its fleet management solutions and supply chain solutions segments, business lines that haven't been as commoditized as product transportation.
Dividend: Ryder's shares currently sport a reasonable 2.4% yield, it pays out around 28% of its earnings as dividends, and it increased its dividend by nearly 11% last year. That reasonable payout ratio indicates that it has room to continue its seven-year streak of dividend increases as its business continues to grow over time.
Balance sheet: Ryder's 2.7 debt-to-equity ratio is not excessive for its industry, and its current ratio around 1.1 indicates that it's not likely to face a liquidity crunch in the near future. Thanks to its decent balance sheet, Ryder indicated in its most recent earnings report that its reduction in leverage versus the previous quarter gives it enough breathing room to resume repurchasing its shares.
Valuation: Ryder's market capitalization currently sits at about $3.6 billion. Using a discounted earnings model, I estimate its fair value to be closer to $4.1 billion. Of course, all fair value estimates are based on projections of an uncertain future. Still, seeing Ryder's market cap slightly below my fair value estimate indicates that there's some room for that estimate to be wrong while the investment could still turn out OK.
Investment No. 2: Robert Half International (NYSE:RHI). Robert Half International is best known as an employment agency, offering staffing in accounting, information technology, and office administrative positions. As an employment agency, its fortunes are tied to the overall health of the job market, but as a company that has been in the staffing industry since 1948, it knows how to navigate economic cycles well.
Dividend: Robert Half's shares currently sport a decent 2.3% yield, it pays out around 30% of its earnings as dividends, and it raised its dividend by 10% earlier this year. That reasonable payout ratio indicates that it has room to continue its 12 year streak of dividend increases as its business continues to grow over time.
Balance sheet: Robert Half's low 0.1 debt-to-equity ratio is one of the strengths it has that enables it to weather economic storms and come out stronger after they pass. With over $200 million in cash on its balance sheet against a mere $1.2 million in debt, it's well positioned to survive, even if the employment market slows.
Valuation: Robert Half's market capitalization currently sits at about $5.0 billion. Using a discounted cash flow model, I estimate its fair value to be closer to $5.6 billion. Of course, all fair value estimates are based on projections of an uncertain future. Still, seeing Robert Half's market cap slightly below my fair value estimate indicates that there's some room for that estimate to be wrong while the investment could still turn out OK.
Investment No. 3: International Business Machines (NYSE:IBM). IBM is one of the world's preeminent technology companies, with services that range from hardware to consulting to cloud computing and analytics, and even its artificial intelligence platform Watson. While not the near monopoly it was when it virtually owned the computer market in its heyday, IBM is still an incredible force to be reasoned with.
Dividend: IBM recently increased its quarterly dividend to $1.40 per share from $1.30, a better than 7% increase. That continues its 15-year-plus streak of higher payments. Additionally, with a payout ratio of around 40% of its earnings, IBM has room to continue that streak as its business grows over time.
Balance sheet: IBM's 2.8 debt-to-equity ratio means the company is sporting a heavier debt burden than many of its high-tech rivals, but Moody's still gives it a very strong AA rating. With a current ratio of around 1.2 and over $8 billion in cash on its balance sheet, IBM certainly has the chops to cover its near term obligations and to handle a typical economic downturn with grace.
Valuation: IBM's current market capitalization of around $141 billion is right in line with my fair value estimate of $144 billion, reached via a discounted-cash-flow analysis. As IBM is a large, well-followed company, it's rare to find it trading at a substantial discount to its fair value. Still, with its market price in line with that fair-value estimate, it's a company whose stock I'm willing to hold onto at this price.
Stocks to own for the long haul
With their shareholder-friendly dividend policies, decent balance sheets, and reasonable valuations, these companies deserve a chance to potentially become part of a 50-something-year-old investor's portfolio. Just remember that the market is volatile in the short run and no stock investment comes with any guarantees. If you have a long term focus and a willingness to reevaluate the companies' shares as their businesses change over time, Robert Half, IBM, and Ryder are certainly worth looking at today.
Chuck Saletta owns shares of International Business Machines. Chuck also has the following options position on IBM: Short May 2016 $140 Puts, Short May 2016 $155 Calls. Chuck's wife owns shares of Ryder Systems. The Motley Fool recommends Robert Half International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.