Last week we took a closer look at some of the most common money mistakes that senior citizens make. I would contend that the item on top of that list is investing too conservatively.
On one hand, I perfectly understand the reasoning behind seniors' desire to invest their hard-earned money in money market accounts and CDs. They've worked hard for their retirement nest egg and they're afraid to lose this money, as they expect it to sustain them throughout their retirement. However, inflation has historically averaged higher than 3% over the past 100 years, meaning that while the nominal value of seniors' money is slowly increasing in these "safe" accounts, they're ultimately losing money in real terms.
Source: Pedro Ribiero Simoes, Flickr.
In addition, it's not that seniors are threatening to spend more on an inflation-adjusted basis, it's that improvements in health education, eating habits, and medicine are allowing people to live longer now than at any time previously. A current 70-year-old retiree would only have expected to live an average of 64 years as a male or 67 years as a female when he or she was born in 1944. Now that combined life expectancy average has ballooned to 78 years and is only expected to climb further.
What this means is senior citizens need to not only focus on preserving their capital, but also to diversify their investments such that they're giving themselves an opportunity to allow their nest egg to continue to grow. No one ever knows the exact answer to how much you need for retirement, but I've never heard a single retiree complain about having too much.
With that being said, today I'm going to offer up three stocks that seniors can consider adding to their investment portfolio that could give them an opportunity to outpace inflation without causing them to lose sleep overnight. The key to these three stocks is that they pay a dividend, providing seniors with valuable income, which helps counteract inflation. Also, these companies either provide basic-needs goods or services or have seen demand for their goods and services increase for decades, meaning there's little disruption in their cash flow regardless of how well the U.S. economy is doing.
In no particular order, seniors can potentially stay ahead of the curve by considering these three names:
Procter & Gamble (PG +2.07%)
For some people, a dividend is merely something you pocket with a smile on your face. For risk-fearing investors, a dividend is so much more. It represents that a company is financially sound, and a growing dividend implies that demand for its products and/or services is growing.
Consumer-goods giant Procter & Gamble perfectly fits the bill of a dividend company that's exemplified stability to its shareholders over the years. P&G is riding a streak of increasing its dividend in each of the past 58 years. There are but a small handful of publically traded companies that can claim to have a longer streak intact. With a yield of 3.2%, Procter & Gamble is modestly outpacing inflation at the moment and could give seniors quite the boost in their pocketbook.
Source: Procter & Gamble.
But, P&G is more than just its dividend. The company is a veritable Who's Who of what's in your cupboard. It owns the Tide detergent brand, Crest toothpaste, and Duracell batteries, as well as Bounty, Charmin, and Pampers, to name a few. These are basic-needs goods that don't see big sales dips because of a recession. In other words, people still need to brush their teeth, wash their clothes, and buy their baby diapers, even if U.S. GDP is falling. For Procter & Gamble, this means little need to ever discount its products, resulting in steady margins and excellent pricing power that allow it to pass along product price increases to consumers.
Lastly, P&G isn't a very volatile stock. Its beta of 0.4 implies that it's only 40% as volatile as the benchmark S&P 500. This is great news for seniors, as volatility is one of their greatest drawbacks from investing in the stock market.
Johnson & Johnson (JNJ 0.41%)
Another dividend aristocrat seniors should consider, especially if they'd like to take advantage of the growing role that health care is playing in improving life expectancy, is Johnson & Johnson.
Similar to P&G, Johnson & Johnson is going to provide shareholders with a handsome dividend that's currently yielding 2.7%. The only reason this payout has dipped below 3% is the approximate 10% run higher that J&J has delivered to investors this year. Johnson & Johnson boosted its stipend by 6% in April, representing the 52nd consecutive year that it's given its shareholders a raise.
What makes Johnson & Johnson so attractive to seniors is that it gives them a diversified business platform with a three-pronged attack.
First, J&J has a gigantic medical-device division that was boosted in recent years with its $21.3 billion purchase of Synthes. This purchase will help expand J&J's geographic reach, but it also exposes the company to faster-growing emerging markets.
Second, J&J has a well-respected pharmaceutical development division, which includes a number of key cancer-fighting agents such as Zytiga and Imbruvica, as well as revolutionary Type 2 diabetes medication Invokana. However, the cornerstone of J&J's pharmaceutical portfolio continues to be Remicade for the treatment of plaque psoriasis and psoriatic arthritis. All told, pharmaceutical products have a finite patent protection period, but while under patent they can yield margins well in excess of 80%.
Source: Shardayyy, Flickr.
Finally, Johnson & Johnson's consumer-products division provides stability of sales and cash flow in a very similar fashion to P&G's product portfolio. Here you'll find over-the-counter products such as Tylenol and Motrin, as well as Listerine and skin-care products such as Aveeno.
Like P&G, Johnson & Johnson is also a rock when it comes to volatility, with a beta of just 0.54, meaning it's only 54% as volatile as the S&P 500. For seniors ,this means losing less sleep at night and not having to worry about the market's daily gyrations.
NextEra Energy (NEE 0.92%)
Finally, I would encourage seniors to consider a large electric utility provider like NextEra Energy, which is currently sporting a 2.9% yield and, like J&J, is yielding less than 3% only because its share price has advanced by roughly 15% year to date.
The allure of an electric utility is that the product it provides -- electricity -- remains in demand regardless of whether the U.S. economy is in good or bad shape. Individuals and families may try to conserve electricity usage during a recession, but being a basic-needs good means that NextEra doesn't have to reduce its prices, resulting in very predictable cash flow for the company. Moreover, a number of NextEra's operations are regulated, meaning it isn't exposed to fluctuating market wholesale prices, which only further adds to the predictability of its earning potential.
Source: Luis Alves, Flickr.
What seniors might really like about NextEra is that the company is forward-thinking. The U.S. population continues to grow, and so are the energy demands of its people. However, the U.S. government is becoming stricter with carbon emissions, implying that utilities will need to seek alternative forms of energy generation to stay in compliance many years down the road. NextEra is probably the most forward-thinking electric utility in the country, having commissioned more than 10 GW of wind energy as well as other non-emitting alternative energies such as solar and nuclear power.
Like the aforementioned two companies, NextEra Energy also tends to be low on the volatility scale, with a beta of just 0.27. Most utilities are often viewed as defensive investments, which might be the perfect way for seniors to dip their toes back into the water.
