The U.S. has a serious retirement crisis on its hands. As our population ages, millions upon millions of Americans are in or nearing retirement, and many of them are woefully unprepared financially. Retirement planning is a daunting yet necessary task. With so many different investment vehicles and strategies, it's no wonder most individuals feel overwhelmed by the prospect of retirement saving.
One option nearly all investors should take advantage of is the Roth individual retirement account, or Roth IRA. The reason is the magic of compounding interest over long periods of time, and it's precisely why dividend payers like Procter & Gamble (NYSE:PG), AT&T (NYSE:T), and Johnson & Johnson (NYSE:JNJ) are ideal candidates for any Roth IRA.
Which types of investments are best for a Roth?
In a taxable account, you have to pay taxes on dividends and capital gains. Even in a traditional IRA you'll have to pay taxes once you start making the required minimum distributions (though you can deduct your annual contributions). Despite the slight disadvantage of being unable to deduct your contributions from your taxes, a Roth allows you to enjoy a lifetime of completely tax-free earnings. Therefore, thanks to the supreme power of compounding interest, dividends are extremely powerful wealth-building tools in a tax-free account like a Roth.
That's why some of the market's premier companies -- the kind that have sterling track records of paying and raising their dividends over time -- make great holdings for a Roth.
Steady cash flows mean rock-solid dividends
Procter & Gamble, Johnson & Johnson, and AT&T each operate large businesses in extremely stable industries. Their goods and services are found in nearly every household in America and across the world. Consumers have a hard time going without their products, even when the economy is in decline. And when the economy finally improves, their high-quality businesses pump out even greater profits and dividends.
In the past few months, each of these companies has rewarded investors with a dividend increase. P&G recently increased its dividend by 7%, representing the 58th consecutive year of a dividend bump. In all, P&G has paid dividends for 124 years in a row. J&J just raised its dividend by 6%, marking the 52nd year in a row of a dividend increase. In December, AT&T raised its payout for the 30th year in a row. AT&T boasts the biggest dividend of the three, with a yield that tops 5%.
These companies hold such impressive track records in part because of their strong brands. For example, Procter & Gamble holds 25 brands that each generate at least $1 billion in annual sales. Its strong connection with consumers resulted in 3% organic sales growth last quarter, and management expects 3% sales growth for the entire year. Combined with a cost-cutting program, that's P&G's formula for delivering shareholder returns.
Meanwhile, J&J derives 70% of its sales from products that hold either the first or second global leadership position in their respective markets. That's what has allowed J&J to post 30 consecutive years of rising profits, including 8% earnings-per-share growth last year. Meanwhile, AT&T continues to reap the rewards of the global Internet and smartphone booms. The company racked up more than 2 million new wireless and wireline broadband connections in the quarter, which resulted in the highest quarterly revenue growth in more than two years.
Consumer staples, health care, and telecommunications are three businesses that generate extremely stable profits. That's what has allowed each of these companies to hold such impressive dividend track records. They pay their quarterly dividends year in and year out, no matter what. Further, they're able to increase their dividends every year, despite hiccups in the broader economy.
The Foolish bottom line
One of the best ways to reach financial independence by retirement is the Roth IRA, which is too often underused. The Roth remains a fantastic way to build retirement savings and let compounding interest work its magic, with the added benefit of never paying taxes on capital gains or dividends.
If you've already funded a Roth IRA, you've done yourself a huge service, and if you're looking for great stocks to put in it, look no further than P&G, J&J, and AT&T.