Retirement investing has taken quite a turn. Before the financial crisis of 2008-9, it was gospel that investing in alleged “blue chip” and “dividend stocks” would carry an investor through to retirement.
That’s not true anymore.
For starters, inflation is not averaging 3%, because the U.S. government changed how inflation was reported decades ago. It’s actually much closer to 10%. Thus, not only are dividend stocks that pay 3% to 4% not sufficient to keep up with inflation, but those same “safe” stocks are trading at ridiculous multiples while EPS growth in anemic.
My stock advisory newsletter, The Liberty Portfolio, takes a holistic approach to investing for the long-term, whether you are retired or not. One of the approaches is not merely to go for dividend stocks, but for ones that pay well and have a shot at significant capital appreciation.
The retirement stocks listed below are starting points for investors interested in going in this direction. They may not end up as actual picks for The Liberty Portfolio, but it is a starting place.
Dividend Yield: 5%
AT&T Inc. (NYSE:T) is not a stock I would have considered until recently.
Despite taking on massive amounts of debt for the Time Warner Inc (NYSE:TWX) purchase, on top of all the debt it has, T stock maintains terrific free cash flow — $17 billion in the TTM. It paid out about $12 billion of it in dividends. Add in TWX’s $4.6 billion (and a mere $1.2 billion paid in dividends), and the tally gets even bigger.
T stock should continue paying about 5%, and I believe the merger will create more than 5% annual price appreciation. It’s a solid media/telecom/content distribution play that should offer relatively stable investment for both retired and regular investors for some time to come.
Dividend Yield: 3.6%
Chevron Corporation (NYSE:CVX) stands out as a fine choice among other retirement stocks. That’s because the world will always have and always require oil!
Fossil fuel energy use is wrapped into our molecular construction as humans. It isn’t going anywhere, and alternative energy sources have been proven to fail by not providing anywhere near the amount of energy needed.
Oil rules. It always will and you must have some form of energy investment in your long-term diversified portfolio. The Liberty Portfolio sure does. As far as this column goes, the truth is that you can buy any of the big oil explorers/producers and you’ll do just fine over the years.
Dividend Yield: 2.6%
How about a dividend aristocrat?
That’s something else that needs representation in your retirement portfolio, and when it comes to these, I think your best bet is insurance. A company like Cincinnati Financial Corporation (NASDAQ:CINF) only offers a 2.6% yield, but that’s because it used to be higher, as the stock price was lower.
CINF stock has almost doubled over the past five years. That’s because it has prudent risk assessment, does very well in terms of premiums and payouts and it invests wisely.
The company invests its $15.5 billion, and in addition to premiums, generates free cash flow that rose from $640 million in FY12 to $1.09 billion in FY16.
Dividend Yield: 2.5%
Another must-own sector for retirement? Defense and aerospace. Like energy, defense and aerospace are part-and-parcel of America.
We may not be direct consumers of these products, but between corporate and government needs, stocks like Lockheed Martin Corporation (NYSE:LMT) will always do well over time.
Remember the infamous “budget sequester”? LMT has returned more than 200% since those days, which should tell you everything about the resiliency of the sector. Again, it only offers a 2.5% dividend yield, but you are in LMT stock for capital appreciation because of its long-term potential.
The company has plenty of cash flow — more than $4 billion, twice what it needs to pay that dividend — making it an enticing pick among retirement stocks.
Dividend Yield: 4.2%
Duke Energy Corp (NYSE:DUK) represents a different element of energy that retirement investors should have a piece of: utilities. DUK is preferred over some other utilities because it has diversified operations as a provider of energy, commercial power and of course as a utility.
While alternative energy like solar is not a mass-market product, when deployed intelligently, it can produce enough energy to be profitable. DUK has two solar facilities that will deliver over 50 megawatts for the federal government.
The company has a 4.2% yield and a five-year return of about 30%, putting it in the annual total return ballpark of our targeted 10%, and justifying its placement among retirement stocks to buy.
Dividend Yield: 3.8%
As for insurance, I would be remiss if I didn’t include Old Republic International Corporation (NYSE:ORI). The thing I love about ORI is that it offers a complete range of insurance, and that means high-margin products that claims rarely are made on.
For example, take home warranty insurance. People pay several hundred dollars per year for the “privilege” of having a network of low-to-mid-level-talent contractors that consumers still have to pay a $60-70 fee for. Most of the time, a visit fixes the problem. Anything beyond that is replaced.
That’s a great deal for ORI.
That along with automobile extended warranties, and travel accident insurance make for a profitable business and an attractive retirement stock to buy.
Dividend Yield: 2.2%
Finally, I’m not crazy about banks, but U.S. Bancorp (NYSE:USB) is the most well-managed, prudently run bank in the country. Its customers, including me, love it.
It had next-to-no losses in the housing crisis because it didn’t deal in subprime mortgages. It isn’t blowing the doors off in terms of growth, but it is the perfect example of “slow and steady wins the race.”
With 66% price appreciation over 5 years, and a 2.2% yield, you are in good hands with USB.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.