I love to get creative with portfolio construction, whether we’re talking straight-ahead retirement portfolios or a subject that’s a little more esoteric.
As we’re heading into the summer after a very long year enduring the pandemic, I thought I’d mix it up a little. My goal is to identify 10 stocks that would be good for most retirement portfolios.
So, I’ve looked up InvestorPlace.com articles with the word “retirement” in the headline. I’ve decided to take one stock from 10 of these articles. I’ll also try to ensure sufficient diversification in terms of themes, market capitalization, dividend-paying, growth or value, etc. As such, I’ve selected the following:
- NextEra Energy (NYSE:NEE)
- Darden Restaurants (NYSE:DRI)
- Alibaba (NYSE:BABA)
- B. Riley Financial (NASDAQ:RILY)
- Kraft Heinz (NASDAQ:KHC)
- CVS Health (NYSE:CVS)
- PayPal Holdings (NASDAQ:PYPL)
- Electronic Arts (NASDAQ:EA)
- Apple (NASDAQ:AAPL)
- Starbucks (NASDAQ:SBUX)
These are retirement stocks that I think will get the job done over the next 10-20 years. Let’s take a closer look.
Stocks to Buy for Retirement Portfolios: NextEra Energy (NEE)
InvestorPlace’s Vince Martin recommended the Florida utility and renewable energy powerhouse on April 6, along with seven other possibilities to buy in any market conditions.
As Vince points out, utilities are very popular with retirees because they pay consistent dividends. NextEra, because of its renewable energy bent is expected to grow revenues over the next few years near or at 10%. Don’t just take Vince’s word for it, I also recommended NEE in December 2020 as a stock to buy for 2021 because its renewables business generates 40% of its overall earnings.
It’s not cheap at 27 times its forward earnings, but sometimes you have to pay more for quality. NextEra is definitely that.
Darden Restaurants (DRI)
This next one is a bit of a changeup. InvestorPlace’s Chris Markoch included the multi-chain restaurant operator on a list of seven stocks that shouldn’t be in your portfolio. I’m going to go against his advice by saying it should. Here’s why.
My colleague’s argument is that Darden has too much net debt on its books — $4.1 billion as of Q3 2021 (total debt of $5.1 billion less $990 million in cash) — making it tough for the company to raise its dividend in future quarters. Up 140% over the past 12 months, Markoch feels it has run too far, too fast.
I don’t see it that way.
As CEO Gene Lee reiterated in Darden’s Q3 2021 conference call, the company has significantly reduced the number of items on its menus, which has simplified its processes in the restaurant, transforming its business. As a result, hourly labor productivity has improved by 20-30% over the past year.
As business reopens, the changes it has made will last for years, not weeks. Darden’s a diamond in the rough despite its expensive valuation.
Alibaba Group (BABA)
This next one is another that one of my collogues didn’t support. InvestorPlace’s Tom Taulli argued at the end of March that the Chinese e-commerce behemoth could sabotage your portfolio. His rationale is that the Chinese government’s push for the company to be broken up so that it can’t exert too much pressure on the Chinese population is legitimate.
And while several issues didn’t exist a year ago, such as the government’s concern to reduce Alibaba’s influence, the reality is that it’s something that can’t be swept under the rug.
That said, I don’t think there’s any doubt that Alibaba remains a cash flow machine. In the trailing 12 months (TTM), Alibaba had free cash flow (FCF) of 164.4 billion Chinese Yuan ($25.1 billion). That’s 103% of its net income (TTM).
I’ll take that every day and twice on Sunday.
Riley Financial (RILY)
Rather than buy investment banks such as Goldman Sachs (NYSE:GS) or Morgan Stanley (NYSE:MS), InvestorPlace contributor Faizan Farooque recommended the independent investment bank recently because it generates huge gross margins and operating margins, leaving it with lots of cash to pay its dividends. That’s despite RILY stock gaining 41% so far in 2021.
For me, there are a few reasons to be bullish about RILY stock. But one of the main reasons is that it’s relatively independent. Its CEO owns 18.4% of the company and it has a special purpose acquisition company (SPAC) that’s being reasonable about the size of the company it will buy with its $150 million in cash it raised from investors in February.
Up 260% over the past year, its asset-light business model has been delivering outsized returns for more than a decade.
Kraft Heinz (KHC)
In the middle of March, InvestorPlace’s Tom Taulli put the maker of food staples such as macaroni and cheese dinner and ketchup on his list of high-yield stocks for your retirement nest egg.
Tom reasoned that it managed to reduce costs over the past year while continuing to grow its sales, in part, by simplifying the number of products it offered its customers. The old “less is more” trick. Not to mention its stock was still cheap at 14.9 times forward earnings.
The one thing I look at with stocks is free cash flow. That’s especially true with consumer goods companies like Kraft Heinz. In fiscal 2020, it generated $4.33 billion in FCF, which means its current FCF yield is 8.8%. I consider anything above 8% to be in value territory.
It didn’t look as though Warren Buffett’s bet on KHC was going to pan out. However, it is now Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) fifth-largest equity holding with a market cap of $13.1 billion. Berkshire owns 26.6% of KHC.
Buffett paid approximately $30 per share for his stake in Kraft Heinz. At $40, as I write this, Berkshire appears to have finally arrived on the right side of the trade. If you own BRK stock, that’s excellent news.
CVS Health (CVS)
I thought about going with InvestorPlace contributor Tezcan Gecgil’s retirement pick of Procter & Gamble (NYSE:PG) because I use so many of the company’s products. However, I think health and wellness will continue to be one of the most important aspects of any person’s life in the years to come, and CVS is right in the middle of it.
In 2020, the company managed to increase its net income by almost 9%, in large part because it has a diversified health services model that’s able to endure whatever the world’s got in store for it.
With the kind of scale a company like CVS Health has, it can help the communities where it does business. On April 6, it announced that the company had made more than $200 million in affordable housing investments in California.
The more than $43 million it invested in California over the past year will see more than 850 affordable homes built in 10 different cities, with 31% dedicated to seniors housing.
Healthy communities mean healthy businesses, which translates into healthy profits.
As Navellier points out, its online payments platform brings to the table more than 300 million consumer and merchant customers worldwide. Simultaneously, its Venmo cash app added more than 73 million new users in the past fiscal year.
The pandemic did little to slow PayPal. On March 8, PayPal announced that it had acquired Israel-based Curv, a provider of cloud-based infrastructure for digital assets and currencies. Dovetailing with its acquisition was its March 30 launch of “Checkout with Crypto,” where PayPal provides its customers with a seamless way to pay for items using cryptocurrencies.
Over the past 12 months, PayPal has generated $5 billion in FCF from $4.2 billion in net income. That’s an FCF conversion ratio of 119%. Not shabby. And its FCF is likely to keep growing thanks to its healthy revenue gains in recent years.
Electronic Arts (EA)
One industry that benefited from the pandemic was the gaming industry. Whether we’re talking Electronic Arts — its video game franchises include Madden NFL, EA Sports FIFA, Battlefield and Apex Legends — or one of its peers, engagement was up, as was the mobile games business.
How did this increased engagement show up on its financial statements?
Well, there’s a quarter left in EA’s 2021 fiscal year. Over the past 12 months through the end of December, its net bookings were 8% higher than the previous 12 months at $5.96 billion. For those same 12 months, it generated cash from its operating activities of $2.06 billion, a company record.
For all of fiscal 2021, it expects net revenue of $5.6 billion, up slightly from $5.54 billion in 2020. However, it expects net bookings of $6.08 billion, 16.6% higher than a year ago. In gaming, net bookings are the operational metric investors pay attention to because it gives a better picture of a company’s true sales.
Long-term, a gaming stock like EA is a smart move for any retirement portfolio, and if you use their products, it will keep your mind young. That’s reason alone.
InvestorPlace’s Brett Kenwell recently discussed why it makes sense to hold Apple during retirement. My colleague cited the triple B’s in his explanation: Best brand, best balance sheet and best business. Dividend aside, it’s darn near perfect.
While its iPhone business is nice, it is the services segment that really primes the profit pump. As Brett points out, it’s growing faster and twice as profitable.
What’s not to like?
What I find really impressive about Apple is that it generated $80.2 billion in FCF in the past 12 months, 126% higher than its net income. If that $80.2 billion were its market cap rather than its FCF, Apple would still be the 100th largest company in the S&P 500.
Of course, it’s not market cap; it’s free cash flow. That’s what makes Apple a must-hold for any portfolio. And if it’s good enough for a 90-year-old Warren Buffett, it ought to be good enough for you.
I don’t know what was tougher for Starbucks in 2020: The pandemic or losing Chief Operating Officer Roz Brewer to Walgreens Boots Alliance (NASDAQ:WBA).
It’s ironic that Brewer, who Howard Schultz personally recruited to the company, was then recruited away from Starbucks to become the first Black female CEO of a Fortune 500 company.
As Schultz explains his belief in her abilities, “Having personally recruited Roz to Starbucks and seen first hand her leadership skills and many contributions to Starbucks business I know that Roz will make a great public company ceo. I wish her great success in the future.”
Fortunately, Starbucks has a strong and talented bench. While Brewer is a tough person to replace, I’ve followed the company for a long time. It always moves forward.
As for the pandemic, it has given the company valuable insights into its customers’ thoughts about take-and-go coffee and food. They like it. As a result, the company is opening more convenience-led stores and being more responsible about the square feet it rents in certain locations.
If there’s a company that rolls with change, Starbucks is definitely it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.