From the young investor with decades to save for retirement to the current retiree facing the eroding effects of inflation, everyone needs the capital growth potential of stock investing. However, retirees find themselves in a particularly precarious situation. While stocks can help maintain the purchasing power of your nest egg by growing faster than inflation, certain stocks could chip away at your savings, leaving you scrambling to fund your retirement.
Below, three Motley Fool analysts call out three stocks retirees may want to avoid.
Sean Williams: Bank of America (BAC 0.27%)
As an investor in his mid-30s, I consider myself willing to take on far more risk than the average investor. Why? Because I have what I consider to be three or more decades to make up for any losses I might incur while taking relatively high risks. This means some of the investments in my own portfolio, while attractive to me, might not be companies I would ever recommend to the average retiree.
Take Bank of America as a perfect example. Bank of America is currently my top performer, up 225% since I purchased the stock three years ago. While it has delivered big returns for me, and I have no intention of selling it, it's a very risky bet for retirees.
For starters, retirees tend to seek steady income, and Bank of America's dividend isn't exactly blowing the roof off. Even after a dividend increase to $0.05 per quarter, up from a Fed-constrained $0.01 per quarter, Bank of America's forward dividend yield stands at just over 1%. By comparison, more conservative money center banks like Wells Fargo (WFC 0.96%) and U.S. Bancorp (USB 0.27%) are providing 2.6% and 2.2% yields, respectively.
Further, the uncertainty about when Bank of America's legal settlements will end remains a distraction. Since 2009 Bank of America has paid a whopping $61.2 billion in legal settlement fees tied to its mishandling of the credit and mortgage crisis. That amount is close to half of the $128 billion that banks as a whole have paid to the Justice Department since 2009, and it's nearly double the amount owed by JPMorgan Chase (JPM +0.02%), which has the second-highest fines to pay. Until these fines are in the rearview mirror, Bank of America's concurrent profitability remains a question mark.
Finally, I firmly believe retirees should buy easy-to-understand businesses -- and, put simply, Bank of America is far from that. Extending far beyond just loan originations and deposits, Bank of America has its fingers in all facets of the finance market, including derivatives. With even the most astute analysts and shareholders still somewhat in the dark as to what's really in Bank of America's asset portfolio, it's a stock best left untouched by retirees.
Brian Stoffel: Stratasys (SSYS +0.56%)
Perhaps no technology has enjoyed more fanfare over the past five years than 3D printing. That attention has made a lot of investors very rich. Shares of Stratasys and 3D Systems (DDD 3.45%) -- the two largest players in the industry -- have advanced 550% and 900%, respectively, over that time frame.
Currently, shares of 3D printing companies make up about 5% of my overall portfolio, and Stratasys gets the biggest allocation. I think Stratasys has taken a healthy approach to acquisitions -- especially when compared to 3D Systems. To date, it has made two big splashes: a merger with Objet and the purchase of Makerbot.
Merging with Objet allowed Stratasys to focus on the new industrial industries, where I believe the demand is greatest right now, while Makerbot gives the company one of the most sought-after consumer printers, which I believe will see booming demand in the future.
But right now, I'm 33 years old and decades away from retirement. I would never allow Stratasys to occupy such a large part of my portfolio if I were in retirement.
As it is, Stratasys and other 3D printing stocks are very expensive by traditional metrics. Currently, the stock trades for 50 times earnings.
How the technology will be adopted in the future is still in question, and that leads to wild swings in the stock's price. In the past year, it has swung by 5% or more on 13 different occasions. If you are a retiree and are forced to sell shares of Stratasys in order to cover living expenses at a time when the company is in a downswing, that's money you may never make back in the future.
Dan Caplinger: SolarCity (SCTY +0.00%)
Solar energy has become a lot more cost-effective in recent years, and SolarCity has capitalized on the increased demand for residential solar-power systems by making them more affordable for homeowners. Instead of requiring its customers to pay the full cost of solar panels and installation at the outset, SolarCity instead fronts those expenses for homeowners, collecting the tax incentives that federal and state governments make available and selling the generated electricity at a discount to the homeowner. Yet despite the huge growth potential in the solar market, SolarCity carries risks that make it less than ideal for many retirees.
The stock doesn't pay a dividend, and given its business model's voracious cash needs, SolarCity shareholders shouldn't expect dividends in the near future as the company continues to plow available money toward growth.
Moreover, with plentiful sources of cheap natural gas for electrical generation, the traditional utility industry could fight back and make solar power look less economically favorable once again, especially if tax credits are allowed to expire as planned under current law. In the long run, solar's prospects look strong, but SolarCity stock is likely to remain volatile, making it an uncertain choice for risk-averse retired investors.
