Choosing one-size-fits-all investments for people based solely upon their age group is impossible. This is more true with respect to those in their 60s, as this decade is traditionally when most people transition into retirement, or at least make big changes in their work lives. With that said, here are a couple generalizations:
- People in their 60s should still invest in stocks as part of a diversified investment portfolio because they’re one of the best ways to grow capital over time, which is especially important given that many folks will live decades in retirement.
- Those in their 60s shouldn’t favor volatile, higher-risk stocks -- or at least not invest more than a relatively small portion of their portfolio in such stocks.
If you’re in your 60s, I believe you’ll find one or more of these three stocks worthy of an investment: Realty Income Corporation (NYSE:O), American Water Works Company (NYSE:AWK), and Johnson & Johnson (NYSE:JNJ).
The water utility titan that offers stability and growth potential
American Water Works is the largest investor-owned water and wastewater utility in the United States, providing services to approximately 15 million people in 47 states and one Canadian province. While the company mostly operates as a regulated utility, it also has a market-based business where it primarily builds, operates, and maintains water systems for military bases, municipalities, and industrial customers.
This is a company that supplies the most essential product on the planet, which makes it as immune as a company can get to changing tastes and macroeconomic factors such as recessions. Investors, however, don’t need to sacrifice growth potential for this stability. American Water Works' regulated business provides a predictable cash flow, which the company uses to fund its dividend and buy smaller players in the industry, while the market-based business provides an opportunity for organic growth.
As for American Water Works stock, it sports an extremely low beta of 0.16, which means it's just 16% as volatile as the overall market. Investors haven’t had to sacrifice capital appreciation for this quality: Since its April 2008 IPO, the stock’s total return is 345%, leaving all wet the S&P 500’s return of 78.3% through April 29.
American Water Works stock is a top choice for investors most interested in total capital appreciation. Those whose main concern is current income might want to look elsewhere, as the company’s dividend yield is traditionally modest relative to stocks in certain other sectors, such as electric utilities and real estate investment trusts. The stock is currently yielding 1.9%, though the company recently announced a 10% dividend hike. It has a great record of regularly raising its dividend, which is quite secure.
A REIT with predictable growth that pays a juicy dividend
Realty Income Corp. is a top-quality real estate investment trust (REIT) primarily focused on free-standing retailing occupancies in the United States. The company’s portfolio of 4,615 properties located in 49 states plus Puerto Rico was comprised of 79% retail and 21% industrial occupancies at the end of the first quarter.
Known as "The Monthly Dividend Company," Realty Income pays its juicy annual dividend, currently yielding 3.9%, on a monthly basis. Investors haven’t had to sacrifice growth potential for this solid and dependable income stream. Realty Income's total return of 354% over the 10-year period through April 29 makes the S&P 500’s 95% return for this same period look like a low-rent district. Moreover, the stock has a beta of 0.35, so it's only 35% as volatile as the overall market.
Realty Income’s long-term success -- which includes consistently high occupancy rates -- can primarily be attributed to these factors:
- Use of long-term, triple-net leases: Tenants pay variable expenses such as property taxes, property insurance, and maintenance costs.
- Geographically diverse operations: Limits the company's exposure to regional economic slowdowns.
- Tenant diversity: The top tenant of its 243 total tenants represents just 6.8% of its total rental income.
- Focus on stable tenants: Company focuses on tenants whose operations largely insulate them from online competition and make them more resistant to economic downturns. It primarily rents to service-based businesses (such as gyms and movie theaters), retailers offering non-discretionary items (drug stores), or selling lower-price items (dollar stores).
The diversified global healthcare king that sports a healthy dividend
Johnson & Johnson is arguably the most broadly diversified healthcare company in the world. It's probably best known for its popular consumer products, such as Band-Aid adhesives and Tylenol over-the-counter painkillers, though its empire also includes the world’s most complete medical devices business and the fifth-largest pharmaceuticals business.
J&J's pharmaceuticals segment, which accounted for 47% of its total revenue in the first quarter of 2016, should continue to power the company's financial results. The company announced last year that it plans to bring to market 10 novel drugs by 2019 that have blockbuster potential, meaning they could each generate at least $1 billion in annual sales.
Like American Water Works, Johnson & Johnson also supplies one of the most essential classes of products in the world, which provides some degree of stability. (Though, it's much more vulnerable to competition than American Water Works, which is largely a monopoly.) Moreover, several demographic trends should fuel increased demand for healthcare products well into the future, including:
- The aging of the huge Baby Boom generation (those now aged 52 to 69) in the U.S. and other developed countries. People generally need more healthcare products as they grow older.
- The ballooning size of the global middle class in the developing world. This will drive many people to obtain healthcare products they couldn't previously afford.
Like both American Water Works and Realty Income, Johnson & Johnson stock has consistently beat the market over every time period from year-to-date 2016, one-year, five-year, and 10-year. Furthermore, the stock's 0.60 beta means it's only 60% as volatile from a price-swing perspective as the overall market.
J&J's dividend, currently yielding a healthy 2.7%, is as dependable as it gets. The company is among the vaulted "dividend aristocrats," 50 S&P 500 constituency companies that have increased their dividend payouts for at least 25 consecutive years. Johnson & Johnson's recently announced dividend hike marks the 55th consecutive year that it's raised its dividend.
|Stock||Dividend Yield||Beta||1-Year Total Return||10-Year Return*|
|American Water Works||1.9%||0.16||35.4%||345% (8 years, since IPO)|
|Johnson & Johnson||2.7%||0.60||14.6%||159%|
3-Stock Portfolio Average
|2.1%||1.0||(0.2)%||95% (78.3% since American Water Works' IPO)|
While past performance isn't indicative of future performance, it is meaningful. Longer-term performance is often reflective of a company's competitive advantages and how successful its leadership has been at executing on strategies that best exploit those advantages.