Investors looking for retirement stocks in 2021 need to keep 2020 in mind.
Last year might well have been the craziest year in the history of the stock market. Yes, we saw a massive crash in 2008-2009. Before that, the “dot-com bubble” burst in 2000, sending the Nasdaq down an incredible 78%.
But those declines were of a piece with the history of the market. Crashes happen. They aren’t usually — in fact, weren’t ever — followed immediately by massive rallies.
2021 has had its own weirdness. The GameStop (NYSE:GME) rally of course tops the list, with Reddit’s power now extended to dozens of other stocks. But we also have interest rate worries, massive government stimulus and stretched valuations in equities and cryptocurrencies.
There’s a lot of noise. Investors need retirement stocks that can power through that noise. Here are eight of those stocks:
- Amazon (NASDAQ:AMZN)
- Dollar General (NYSE:DG)
- Amgen (NASDAQ:AMGN)
- Verizon (NYSE:VZ)
- Zoetis (NYSE:ZTS)
- NextEra Energy (NYSE:NEE)
- McCormick (NYSE:MKC, NYSE:MKC.V)
- Cooper Companies (NYSE:COO)
Retirement Stocks: Amazon (AMZN)
Obviously AMZN stock is not what investors usually think of when they think of retirement stocks. AMZN long has had a reputation for being expensive. Sometimes prohibitively so. The stock doesn’t pay a dividend, and likely won’t for some time to come. More broadly, tech stocks — even the best tech stocks — aren’t usually thought of as being “safe.”
But slowly but surely, after months of flat trading AMZN’s valuation is coming in: shares trade at just 46x forward earnings. The importance of a dividend (which, of course, reduces the stock price) is far less in a world with zero-commission trading and fractional share ownership.
And as for being safe, one thing investors can count on is that Amazon still has plenty of growth ahead. Think about the retirement stocks investors might have targeted a decade ago, as the market was recovering from the financial crisis. The likes of IBM (NYSE:IBM), Anheuser-Busch (NYSE:BUD), Altria (NYSE:MO) and General Electric (NYSE:GE) were all supposedly “safe” dividend payers. All have underperformed — at best — over the past ten years.
In a changing, volatile world, “safe” isn’t the same thing it used to be. AMZN is finally at a reasonable valuation, which means it’s a lot safer than some investors might realize.
Dollar General (DG)
Admittedly, some investors might not be ready to jump into AMZN just yet. There are other choices in retail.
Walmart (NYSE:WMT) is another stock that has flatlined recently. But the choice here is Dollar General, despite its lack of an e-commerce business.
DG stock has also struggled in recent months, dropping 2.7% over the past six months. But at this level, its valuation looks attractive. DG stock is at 22x the midpoint of earnings-per-share guidance for the current year.
Results this year admittedly look soft, with Dollar General guiding for a decline in revenue. But, of course, this year’s results are being compared against a pandemic-driven fiscal 2020 (which ended Jan. 29). Two-year growth rates still look solid, and longer-term, Dollar General still has new markets to enter.
Investors figured that out quickly after DG sold off following earnings. The recovery should have further to go in the short term, while the long-term outlook remains bright.
Historically, traditional pharmaceutical names like Pfizer (NYSE:PFE) and Merck (NYSE:MRK) were on any list of retirement stocks. But both pharma names have struggled to keep up; even MRK is flat to late 2018 highs. There simply hasn’t been enough innovation or value-creating acquisitions to drive long-term shareholder value.
But biotech Amgen looks more attractive. The company still is driving growth, including a 12% increase in adjusted EPS during 2020. Valuation is reasonable at 15x forward earnings. Acquisitions continue apace, including recent agreements to buy oncology startup Five Prime Therapeutics (NASDAQ:FPRX) and privately held Rodeo Therapeutics. Add in a 2.8% dividend yield and AMGN looks like a long-term winner.
There are some attractive old-fashioned retirement stocks out there. VZ stock is one of them. The stock is cheap, at about 11x forward earnings. A 4.3% yield adds income as well.
There are some concerns here. Notably, Verizon’s wireline business remains in permanent decline. The company has lagged cable companies like Comcast (NASDAQ:CMCSA) in video as well.
But the wireless business is what really matters. And there, Verizon looks like a winner. A larger T-Mobile (NASDAQ:TMUS) might be a threat after its merger with Sprint, but Verizon continues to take share from AT&T (NYSE:T). Given a years-long integration for T-Mobile and Sprint, and AT&T’s persistent debt, management and execution concerns, I’m not ready to believe Verizon is going to suddenly fall behind.
This is not a flashy, “beat the market” play. It’s a defensive, safer play with a solid yield. Those retirement stocks — that truly are safe, rather than just looking like it — are hard to find in this market. VZ should be on any investor’s list.
Zoetis stock is not cheap. A 0.64% dividend yield is not going to get dividend investors excited. And with a sharp rally from an eight-month low reached early last month, some investors might look for a better entry point.
But ZTS still looks good enough. It’s the largest animal health company in the world. Companion pet adoption rose sharply during the novel coronavirus pandemic — and those pets will be around for years to come.
Growth is impressive. Margins are excellent. And Zoetis doesn’t really have a competitor at scale. There are few businesses in the world that are better examples of the well-known Warren Buffett maxim that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Add in the defensive nature of the business and ZTS, even after the rally of the past few weeks, looks like a solid long-term buy.
NextEra Energy (NEE)
Utilities are common parts of any retirement portfolio. The sector is defensive. Nearly all utility stocks pay healthy dividends. Valuations never get out of hand (not even in a zero-interest rate environment).
The sector isn’t flashy, and usually offers little growth, but most utility stocks are considered safe.
NextEra stock is a bit different. Thanks to an impressive renewable energy portfolio, the company has significant growth potential. Adjusted earnings per share in fact rose more than 10% year-over-year in 2020, and Wall Street sees high single-digit growth the next two years.
NextEra stock admittedly is priced as such. A 27x forward price-to-earnings multiple is far and away the highest among major utility stocks, while a 2% dividend yield is among the lowest.
But, as I wrote late last year, this is a case of paying up for quality. NEE stock might not be a traditional utility stock — but that’s hardly a bad thing.
Historically, CPG (consumer packaged goods) and food manufacturers have been considered safe stocks as well. That’s changed in recent years.
Supermarkets increasingly are looking to private-label and store-brand options to boost their own options. Smaller, more focused competition has sprung up and fragmented the market. Consumer preferences have changed: companies like Campbell Soup (NYSE:CPB) and General Mills (NYSE:GIS) have been forced to diversify away from what were once their strongest categories.
McCormick, however, is in a far better position. Demographics actually are in its favor: unlike cereal or soup, younger customers like spices and seasonings more than their parents. McCormick has a big private label operation; those sales aren’t quite as profitable, but at least they’re not lost.
Like the other retirement stocks on the list, MKC stock isn’t cheap. But investors are better off paying 28x earnings for MKC than 18x earnings for a business at risk of declines. Once again, this seems like a case of paying up for quality.
Cooper Companies (COO)
The contact lens business doesn’t get a lot of attention, but it’s one of the most attractive out there. U.S. market growth is stable, yet there is a massive opportunity in developing markets. Competition is stiff but relatively limited, with four major players.
All four have intriguing bull cases. Bausch Health (NYSE:BHC), given a still-heavy debt load, doesn’t quite make the cut for retirement stocks, but does have potential upside. Johnson & Johnson (NYSE:JNJ) remains a solid long-term pick.
But the two pure-plays look the most attractive. Those are Cooper and Alcon (NYSE:ALC).
Alcon has slightly higher potential as it tries to execute a years-long turnaround following its split from Novartis (NYSE:NVS). But that creates higher risk as well.
So as far as retirement stocks go, COO looks like the pick. Growth has been impressive. Cooper has taken share. Profit margins are enormous.
This is a business that can grow for decades to come — and one that can be a strong foundation of a retirement portfolio.
On the date of publication, Vince Martin held a long position in AMZN.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.