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When you're choosing stocks for your retirement portfolio, there are a few things to look for. Obviously, you want stocks that aren't excessively risky. In addition, you should look for stocks with strong and growing dividends, as well as the potential to appreciate over the long run. We asked three of our contributors for good examples of retirement stocks readers should consider buying now, and here's what they had to say.
A railroad company that'll keep paying you
Brian Stoffel: At 34 years old, I'm still decades away from buying my "retirement stocks." But if I were able to call it quits tomorrow, one of the first stocks I'd be interested in is CSX Corp. (CSX 2.83%). The company has a wide moat around it, it's reasonably priced, and it offers a healthy dividend.
CSX relies heavily on the energy industry, particularly coal, for its shipping volume. The weak energy market, combined with the possibility of a long-term downtrend in coal, has CSX hurting right now. Of the 12 different industries that use CSX's rails, only two have favorable outlooks for the upcoming quarter.
That might lead some to stay away from the stock, but I think it makes now a great time to consider purchasing. These industries ebb and flow, and we're certainly at a weak point. But competitors can't displace the 21,000 rail miles the company owns (mostly on the East Coast). As the American economy continues its recovery and the energy market eventually stabilizes, customers will call on CSX more and more to transport their goods.
In the meantime, you're getting a fair deal on shares. Currently trading for just 15 times earnings -- a roughly 40% discount to the S&P 500 -- CSX is reasonably priced, given the short- to medium-term pain investors need to prepare for. But they'll be able to collect a 2.5% dividend yield along the way, and that yield looks easily sustainable, as only 67% of free cash flow was used to pay it out last year.
Industry dominance and low operating costs
Matt Frankel: Public Storage (PSA 0.72%) has a lot of what I look for in a retirement stock. For starters, it's the dominant company in its industry. No other self-storage brand is as recognizable as Public Storage, and the company is larger than its next three competitors combined.
Growth is also important for retirement investors. Obviously, a strong growth rate can help build your nest egg before retirement. After you retire, growth is important for making sure your income keeps up with inflation. And Public Storage has grown impressively. Over the past decade, the company has grown its core funds from operations at a 9% annualized rate, and it has been able to increase its dividend at an even more impressive 13% yearly rate.
While the company's 3.11% dividend yield is actually on the low end for real estate investment trusts (REITs), it's above the S&P 500 average and should continue to grow at a strong pace. The self-storage industry is still highly fragmented, meaning there should be plenty of opportunities for growth in the future.
Finally, retirement stocks need to be able to weather recessions without losing money, and Public Storage can certainly do that. Self-storage properties have lower ongoing maintenance costs and turnover expenses than other forms of real estate, and Public Storage has extremely low debt. This combination means that the company needs just 30% occupancy to break even, and currently more than 95% of its rentable space is leased. A better margin of safety is difficult to find.
Paying digital dividends
Eric Volkman: Digital Realty Trust (DLR 0.10%) hasn't been around long enough for most investors to consider it a retirement stock, but they should rethink that. It's the best REIT specializing in data centers on the market today.
That's an excellent business to be in, and it will remain so well into the future. Cisco's (CSCO 0.49%) latest annual Visual Networking Index estimates that the world's IP traffic will more than double between now and 2020, growing at a compound annual growth rate of 22%.
The heavier that traffic, the greater the need for data centers. To satisfy that demand, Digital Realty Trust has been growing through acquisitions both here and abroad. That, plus solid organic growth, has fueled the company's impressive growth. In the REIT's most recently reported quarter, revenue rose by 23% on a year-over-year basis to $515 million, while funds from operations (the key REIT profitability metric) rose by 16% to $204 million. This despite the impact of the strong dollar on this increasingly global operator.
Digital Realty Trust's dividend is also on the rise. It has increased precipitously since the company's IPO in 2004, from just over $0.15 per share to the current $0.88. That's a substantial 3.5% yield with room to grow.
