An old rule for fund allocation to equities is to subtract your age from 100. As an example, a person who is 60 years old can possibly have 40% of his cash holdings allocated to equities. However, a lot depends on the risk-taking ability of an investor. I believe that investments in retirement stocks should focus largely on companies in a mature industry with stable cash flows.
In order to choose stocks for a retirement portfolio, I have used the following criteria.
The stock should have a beta of less than one. High-beta stocks might provide higher returns when markets are bullish. However, capital preservation is the key for retirement investments, and low-beta stocks protect the capital.
The company should have a multi-year history of dividends and the balance sheet fundamentals should be robust. A good retirement portfolio is one that provides investors with steady cash flows. In a low-interest-rate environment, it makes sense to buy stocks that have a healthy dividend yield.
I have also focused on high-quality stocks that have strong fundamentals, but have been under-performers in the last one year. Exposure to these stocks will give investors potential capital gains in addition to dividend income.
Overall, in my view, retirement investments should focus on capital preservation and returns that beat inflation.
Let’s discuss seven stocks that have been screened and deserve a place in the retirement portfolio.
- Costco Wholesale (NASDAQ:COST)
- Lockheed Martin (NYSE:LMT)
- Johnson & Johnson (NYSE:JNJ)
- Walmart (NYSE:WMT)
- Procter & Gamble (NYSE:PG)
- AstraZeneca PLC (NASDAQ:AZN)
- PepsiCo (NASDAQ:PEP)
Retirement Stocks: Costco Wholesale (COST)
Costco is attractive at current levels and worth buying for retirement investments. In the last year, COST stock has moved higher by over 5%. However, an annual dividend of $2.80 and a low beta of 0.65, makes the stock perfect for a retirement portfolio.
From a business perspective, Costco has been delivering strong numbers. For the first quarter of 2021, the company reported sales growth of 16.9%. Further, for January 2021, sales growth was 17.9% on a year-on-year basis. With a strong financial performance, COST stock is bound to trend higher from current levels.
It’s also worth noting that the company’s e-commerce sales growth for Q1 2021 was 86.4%. With the company building strong online presence, it’s likely to remain competitive. The company already has online presence in eight countries.
From a cash flow perspective, Costco has 107 million card holders and currently earns $3.5 billion in membership fees. With a global renewal rate of 88%, the company is well positioned for strong cash flows.
Costco has a strong presence in U.S. and Canada. However, the company is entering new markets, which includes China and France. If growth gains traction in China, the company’s top-line growth and membership fee growth are likely to remain strong.
Overall, Costco’s business is relatively immune to economic fluctuations and the company has robust cash flows. Dividends are likely to continue increasing on an annual basis. These factors make COST stock among the top names to consider for retirement investments.
Lockheed Martin (LMT)
With an annual dividend payout of $10.40 and an attractive dividend yield of 3.1%, Lockheed Martin is an attractive option for the retirement portfolio. LMT stock also has a low beta of 0.94. On top of these factors, the stock trades at a trailing price-to-earnings ratio of 13.8. With sustained financial growth, the stock is undervalued.
Lockheed Martin, being in the defense sector, is also immune to economic shocks. This point is underscored by the fact that the company’s order backlog has continued to increase on a year-on-year basis. The company closed FY2020 with a record backlog of $147 billion, which provides clear revenue visibility.
A near-term headwind for the company is the extension of the review by regulators on the proposed acquisition of Aerojet Rocketdyne (NYSE:AJRD). However, even in the worst-case scenario, I don’t see significant downside from current levels.
Coming to the financials, the company reported operating cash flow of $8.2 billion for FY2020. Strong OCF has allowed the company to return $3.9 billion to shareholders in the form of dividends and share repurchase. Given the order backlog, value creation is likely to continue.
It’s important to note that NATO allies are targeting 2% of GDP spending on defense. Most countries fall short of this target spending. This implies higher defense expenditure in the next few years, which is good news for Lockheed Martin.
Overall, LMT stock is among the top stocks to consider for retirement investment. Besides the healthy dividend payout, I expect significant capital gains from current levels.
Johnson & Johnson (JNJ)
Johnson & Johnson is another quality name that deserves a place in the retirement portfolio. From a technical perspective, JNJ stock has strong support roughly around $150 levels.
On Feb. 27, the company received approval from the U.S. Food and Drug Administration for the emergency use authorization of the Janssen Covid-19. This is a potential near-term trigger for the stock trending higher.
Similar to the other names discussed, JNJ stock has a low beta and an attractive dividend yield of 2.5%. In a low interest rate environment, the yield is attractive. Importantly, dividends are sustainable considering the company’s business outlook.
In terms of the business outlook, Johnson & Johnson is well diversified. The company’s biggest revenue segment is pharmaceutical sales. For FY2020, the segment reported $45.57 billion in sales, which was higher by around 8% on a yoy basis. With strong presence in neurology, oncology and infectious diseases, segment sales are likely to remain strong.
The consumer health and medical devices segment growth was impacted in FY2020 due to the pandemic. However, these segments will continue to deliver strong cash flows in the coming years.
It’s worth noting that for the last year, the company invested $12.2 billion in research and development. These investments will manifest in the form of a strong pipeline of products across segments.
With these factors, JNJ stock is a good retirement investment. The company’s strong free cash flows point to sustained growth in dividends, which is a key criterion for a retirement portfolio.
The U.S. economy is primarily driven by consumption spending. A key objective of expansionary monetary policies and fiscal stimulus is to boost consumption spending in the economy. Walmart is one of the best plays in that sector.
WMT stock has gradually trended higher by 11% in the last year. However, stable dividends and a low beta of 0.48 are the factors that make WMT stock worth considering for your retirement stocks.
To put things into perspective, Walmart reported operating and free cash flow of $36.1 billion and $25.8 billion respectively for FY2021.
In terms of growth, I am bullish on Walmart’s global presence. On a constant currency basis, the company’s international sales increased by 5.2% in FY2021. This growth was driven by strong sales in Mexico, Canada and India (Flipkart).
India is home to over 1.3 billion people and the adoption of e-commerce is still at an early stage. The country can be among the top markets for Walmart in the next decade. In the U.S., Walmart is focused on building supply chain capacity, automation and improving omni-channel sales. The company’s e-commerce growth was 69% on a yoy basis.
Overall, even with an increase in minimum wages in the United States, Walmart is well positioned to deliver healthy margins and strong cash flows. Dividends are likely to continue increasing, making the stock attractive for income investors.
Procter & Gamble (PG)
PG stock has been in an extended period of consolidation and has been almost sideways in the last year. With a low beta of 0.41 and a dividend yield of 2.55%, the stock is worth considering for a defensive portfolio. At a trailing P/E of 23.9, I also believe that PG stock can deliver health capital gains after underperforming in the last one year.
It’s important to note is that PG stock might have traded sideways. However, the company’s organic sales growth and earnings growth has been healthy. For Q2 2021, organic sales growth was 8% with all 10 global product categories witnessing growth. As a matter of fact, sales growth has been at or over 5% in the last six quarters. Further, for Q2 2021, core earnings per share growth was 15%.
In terms of dividends, the company reported operating cash flow of $5.4 billion for the most recent quarter. This positions the company well for value creation through dividends and share repurchase.
Due to the pandemic, Procter & Gamble did face channel and supply chain disruption headwinds. This impacted growth in Asia Pacific, Middle East and Africa. However, I believe that growing presence in emerging markets will ensure sustained growth for the company in the coming years.
Overall, PG is worth buying for your retirement stocks. The company has a strong business, healthy financials and attractive dividends.
AstraZeneca PLC (AZN)
Among companies in the pharmaceutical sector, I like AstraZeneca for a place in the retirement portfolio. AZN stock has been in a zone of consolidation in the last one year.
Based on analyst ratings, the stock has an average price target of $63.95. This would imply a 35.7% upside from current levels of $47.04. Besides being undervalued, AZN stock has a beta of 0.17 and a dividend yield of 2.93%. These are big reasons to consider exposure to the stock.
For FY2020, AstraZeneca reported strong top-line growth of 10%. New medicines were a key contributor to growth with $3.5 billion in incremental revenue contributions. With AstraZeneca having a strong late-stage pipeline, it’s likely that healthy top-line growth will sustain in the coming years.
AstraZeneca reported net debt of $12.1 billion as of FY2020. Besides stable dividends, one of the financial priorities of the company is to de-leverage. With strong operating cash flows, the company is positioned to report better credit metrics in the next few years.
Overall, a strong investment in research and a deep pipeline of new products are positive triggers for the company. At current levels, investors stand to benefit in the form of capital gains and steady dividends.
With a long history of shareholder value creation, Pepsi stock is another name to include among retirement investments. Like all the other names discussed, PEP stock has a low beta of 0.61. In addition, a dividend yield of 3.1% makes the stock worth considering.
PEP stock has been an underperformer in the last year with negative returns of 5.84%. However, the average analyst estimates a price target of $151.95 for the stock. This implies an upside of around 17% from current levels.
It’s important to note that even as PEP stock remains depressed, the company’s top-line and earnings growth has been steady. Even for FY2021 PepsiCo is expecting mid-single-digit organic revenue growth.
In terms of specific businesses, I am bullish on growth from the beverage segment. Recently, the company launched Neon Zebra, which caters to the growing cocktail mixers category. PepsiCo believes that the cocktail category is worth more than $858 million. Therefore, product innovation is one growth trigger for the company.
As a matter of fact, PepsiCo now has 23 brands that generate more than $1 billion each in annual sales. With a wide product offering and global presence, the company is positioned for steady growth and value creation, and caps off my suggestions for the best retirement stocks.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.