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No one ever said saving for retirement was easy, but what people often fail to realize is that deciding what to invest in can be just as difficult. There are more than 7,000 publicly traded equities for investors to choose from, and narrowing down what to buy in retirement can be as tough as locating a needle in a haystack.
The good news here is that there are certain industries perfectly suited to retirees. These industries typically offer steady long-term growth and reasonably low volatility, and most stocks usually pay healthy dividends. One such industry is banking.
Why bank stocks could be a great addition to your retirement portfolio
For some investors, the pain of the Great Recession and the struggles of our nation's banking system are still fresh memories. However, most banks are actually run as fairly conservative businesses that make money through deposit and loan growth.
There are a laundry list of reasons why you might want to consider adding bank stocks to your retirement portfolio. A long history of dividends is one, but I would contend that the importance financial stocks play in the growth of the U.S. economy is an even bigger reason to consider the investment potential of banks. Banks are critical to the lending process that spurs business expansion and M&A activity.
Since the Great Recession, banks have also been a lot smarter when it comes to who they lend to and how much they'll lend. This has allowed banks to fully participate in bull market rallies and an expanding U.S. GDP, while protecting themselves from getting caught up in another wave of excessive loan defaults.
Three bank stocks all retirees should own
Which banks should seniors be looking to buy for their retirement portfolios? I would suggest the following three are prime examples.
Image source: MyFuture.com via Flickr.
Wells Fargo (WFC 2.73%)
Wells Fargo may be the best-run bank in the country. Not surprisingly, it's also the largest holding in Warren Buffett's portfolio. Based on a recent 13-F filing from Berkshire Hathaway, Buffett's company owns more than 470 million shares ($26.1 billion in market value), or 9.2% of Wells Fargo's stock. Warren Buffett has a five-decade track record of seeking out undervalued, well-run companies, so his unwavering support of Wells Fargo should be viewed by retirees as a strong buying point.
However, there's more to Wells Fargo's appeal than just "Buffett owns it!" Wells Fargo ignored the allure of derivatives prior to the Great Recession and stuck with its strategy of growing its deposits and issuing consumer and commercial loans. The result was that Wells Fargo remained healthfully profitable through even the depths of the Great Recession while nearly all of its comparably sized peers reported huge losses. Credit goes to CEO John Stumpf, Wells Fargo's leader since 2007, for steering clear of risky investments.
All in all, Wells Fargo offers volatility below the average of the S&P 500 index, pays out an S&P 500-topping 2.7% dividend yield, and sports a return on assets over the trailing 12-month period of roughly 1.4%, which is well above the industry average for large money center banks.
Image source: Capital One Financial.
Capital One Financial (COF 3.55%)
Capital One Financial is far from being your "typical" bank stock, which is what makes the company such an attractive long-term hold.
Whereas traditional money center banks rely on deposits and loans, Capital One Financial's bread and butter business is based around lending -- specifically its domestic credit card operations. Most banks would be lucky to earn a net interest margin (the difference between the rate at which a bank borrows money and the rate that it lends it out) in the 3% to 4% range based on the current low lending rate environment. Capital One's net interest margin in the latest quarter totaled a juicy 6.73%, driven by credit card interest rates, which are usually higher than mortgage and auto loan lending rates. Capital One is also benefiting at the moment from historically low loan delinquency rates, which have boosted its bottom-line.
Another reason to consider buying Capital One Financial is that its business is intricately tied to the health of the U.S. economy. Even though this means periods of weakness during economic downturns as credit delinquency rates rise, the odds seem to be in your favor since bull markets and periods of economic expansion extend for far greater lengths of time than recessions.
As icing on the cake, Capital One Financial is yielding 2%, in-line with the average yield of the S&P 500.
Image source: Flickr user Mark Moz.
US Bancorp (USB -0.20%)
Last, but certainly not least, I'd encourage retirees to give US Bancorp a serious look.
US Bancorp and Wells Fargo share a lot of similarities in that US Bancorp has demonstrated strong organic growth in deposits and loans. During the third quarter US Bancorp recorded 9.5% growth in commercial loans, a 5.6% jump in retail loans, and a 6.9% rise in year-over-year deposit growth. But it's US Bancorp's consistently superior return on equity over the trailing 12-month period compared to its banking peers that's likely to get the attention of investors and drive the company's profits higher.
Another long-term growth driver is US Bancorp's diversified loan portfolio. Aside from also avoiding risky investments like derivatives prior to the recession, only around a quarter of its nearly quarter-trillion-dollar lending portfolio is tied to the housing market. Not being overly reliant on residential mortgages, second mortgages, and home equity lines of credit helped protect US Bancorp from a steep earnings downturn between 2007 and 2010.
Currently yielding 2.3% and sporting a superior ROE (currently 13.3%), there's little reason to believe that US Bancorp can't outperform its peers over the long run.
