Plenty of studies suggest Americans getting close to retirement can expect to live longer than generations past. That's great news -- if you have a steady form of income you can depend on throughout your golden years.
One of the best ways to make it rain money throughout your retirement is by investing in companies with strong competitive advantages that should allow them to steadily grow profits for decades.
We reached out to three Motley Fool contributors to see which stocks they feel are positioned for long-term profit growth, and prepared to return a steadily growing slice to their shareholders. Read on to see which retirement stocks they like best.
A less-conventional retirement stock to buy
Sean Williams: It may not be a stock you'd normally consider for retirement, but following its better-than-15% tumble in May, I'd opine that biotech blue-chip Gilead Sciences (GILD -1.07%) be given some serious consideration by seniors.
For starters, Gilead's dominance in hepatitis C doesn't look as if it'll be disrupted anytime soon. Gilead's Harvoni and Sovaldi have combined for about 90% of HCV market share, mainly on account of Harvoni being a once-daily pill that effectively eliminates detectable levels of the hepatitis C virus following treatment. Although other treatment options now exist beyond Harvoni and Sovaldi, none provide superiority over Gilead's medicines, which will be needed to push them out of their dominant position. Furthermore, Gilead could be just weeks away from introducing a pan-genotypic HCV treatment that could up the bar even more. As long as Gilead retains its superior market share, it'll also retain incredible pricing power and juicy margins.
Speaking of pricing power, Gilead Sciences has turned its success in treating HCV into a mammoth annual cash cow. Over the trailing 12 months, Gilead has generated nearly $18 billion in free cash flow, and I would anticipate this figure remaining somewhat consistent (plus or minus or a few billion) over the next five to 10 years. What this means for investors is ample cash to enact share buybacks and increase its dividend policy. In February, Gilead unveiled a $12 billion buyback program and boosted its quarterly payout by more than 9%, to $0.47. Based on the recent dip in its share price, Gilead is now yielding a healthy 2.3%.
This cash flow also allows Gilead to go shopping to complement its existing pipeline, or to further its organic pipeline development. Two areas of pipeline interest for Gilead are hepatitis B, which is an even larger patient pool opportunity than HCV, and nonalcoholic steatohepatitis. If Gilead can land a slam-dunk as it did when it acquired Pharmasset in 2011 (which is how it obtained Sovaldi), it could prove unstoppable.
Gilead's solid dividend, superior free cash flow, and anemic forward P/E of just seven make it an intriguing long-term buy.
A slow but steady retirement stock
Cory Renauer: Gilead's value proposition is hard to pass up, but my favorite retirement stock is med-tech juggernaut Medtronic (MDT -0.74%). Science and innovation play an important role in this space, but competitive pricing matters most.
After its purchase of Covidien early last year, Medtronic became the single largest member of its industry, and it escaped the developed world's highest corporate tax rate for one of its lowest. This adds up to a company that can sell its products at lower prices than smaller competitors, while maintaining healthy profit margins.
By competing on price, Medtronic plans to dominate all segments of the industry it has an active role in, including diabetes, its smallest segment by sales. In May, it took another step toward its goal when America's largest health insurer, UnitedHealth Group designated Medtronic as its preferred provider of insulin pumps. Patient safety, service, and cost were listed as key considerations in the decision. I'm inclined to believe the latter played a larger role than the former.
Depreciation of intangible assets associated with its enormous acquisition of Covidien are taking a huge slice out of the company's reported earnings. If you look at its high payout ratio, you might expect a freeze or slash is ahead. However, management is committed to returning 50% of its free cash flow to shareholders through dividends and repurchases.
Medtronic has raised its dividend for 38 consecutive years at a compounded annual growth rate of 18%. This is my favorite retirement stock to buy in June, because that's when it typically announces dividend raises. Last year, a whopping 25% hike kept me smiling all summer long, and I'm expecting another double-digit hike this June.
A "priceless" retirement stock for your portfolio
Jason Hall: Whether you're already retired, or looking for great stocks to buy in your retirement account to hold for the long term, MasterCard Inc. (MA -2.20%) should be on your list. The reasons are twofold:
- There's a massive opportunity for long-term growth.
- A track record of strong shareholder returns is likely to continue.
MasterCard is a stock many retirement-focused investors overlook, because it only pays a dividend yielding around 0.7% today, and people mistakenly think plastic is already everywhere and the growth opportunities aren't that big. The reality is, from a global perspective, electronic payments are only just getting started:
Even in the U.S., half of transactions are still cash-based, but globally, there's an even bigger opportunity to grow, particularly in emerging economies, where the middle class is expanding at enormous rates. Factor in the growth of mobile technology, and mobile payments are likely to be a big driver of international growth. In other words, there's still huge growth ahead of MasterCard.
Still, shareholder returns will be fueled by more than just a growing market. The company first paid a dividend of about $0.01, split-adjusted, in 2006. Today's $0.19 per-share quarterly payout is nearly 20 times bigger. And while the company may not be able to increase the dividend 20-fold over the next decade, the current payout is only about 20% of earnings, leaving significant room for continued increases. Management has also aggressively bought back shares, reducing the total count almost 19% over the past decade, and it plans to continue its buyback program.
Bottom line: If you're going to buy a stock for your retirement this month, MasterCard is worth putting on your list.