You've spent your over four decades in the working world, toiling to make sure you and your family were taken care of. Once you enter retirement, it's time to pursue your passions, spend time with family and friends, and take a nap whenever you want to. The very last thing you want to do is worry about money.
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But with the typical American retiring at 62 and living until 82 (male) to 85 (female) years old, your nest egg needs to be able to provide for at least 20 years. That's why selecting the very best stocks for your retirement portfolio is so important.
Below are two stocks that share three important characteristics for retirees: They have sizable and healthy dividends, they trade for a fair price, and -- most importantly -- they have significant competitive advantages that should make them just as relevant two decades from now.
What makes Verizon such a good stock for retirees?
There are only four major telecoms left in America, and none has a larger market share than Verizon . Here's where the four -- including AT&T, Sprint, and T-Mobile-- currently stand, according to Statista.
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Currently, the company pays out a 4.46% dividend yield, and that yield is very healthy. Over the past year, Verizon took in $18.7 billion in free cash flow, but used just 46% of that to pay its dividend. In other words, the dividend is very safe if times get tough for the economy. And if they don't, there's lots of room for growth. In fact, the company has increased its payout every year for the past 11 years.
The stock is also fairly priced, trading at just 11 times free cash flow. The broader market, for comparison's sake, trades for 24 times earnings. Of course, part of that is because Verizon is a slower grower. But that should be just fine for retirees, who can benefit by reinvesting their dividends at these prices and reap the benefits of future advances in the stock price.
Finally, Verizon has a sizable moat surrounding it. The telecom industry is highly regulated and -- as I said before -- Verizon has the largest chunk of it. After buying out Vodafone's stake in Verizon Wireless, one out of every three wireless customers are on Verizon's network. Given the ubiquity of mobile connectivity, and its importance to our everyday lives, I don't see Verizon's business declining any time soon.
Is AbbVie really a good retirement portfolio candidate?
One of my goals here is to offer a diverse set of choices. While Verizon is a huge telecom, AbbVie is one of the nation's largest pharmaceutical companies. The company's three most important drugs on the market today are Humira (rheumatoid arthritis), Imbruvica (cancer), and Viekira Pak (Hepatitis C).
Of course, there are patent expirations on all such drugs, which reduces the company's competitive advantages. But there are two things that lead me to believe AbbVie will still be an important player 20 years from now. Over the short term, the company has three promising drugs either in its pipeline or about to be offered on the market: venetoclax (leukemia), Empliciti (multiple myeloma), and ZYNBRYTA (multiple sclerosis).
Over a longer time frame, I think Abbvie's cash position gives it its most important advantage. Currently, the company is sitting on $8.6 billion in cash. While it also has a sizable debt load, it churned out $7.6 billion in free cash flow -- more than enough to cover its obligations. That amount of cash means AbbVie can buy out smaller companies that develop breakthrough technologies and use its size and distribution network to take these newer drugs to market.
Given that optionality, the company's price tag of just 13 times trailing free cash flow seems more than fair. Analysts seem to think so, too -- as the company currently has a price-to-earnings growth ratio of 0.80 (anything below 1.0 means it's considered cheap).
Just as importantly, AbbVie has a very healthy 3.6% dividend yield. Over the past year, only 45% of the aforementioned free cash flow was used on its dividend. As with Verizon, this means it is a safe dividend with lots of room for growth.
While there's always a threat of not coming out with a blockbuster drug, AbbVie's position in the market and its cash cushion should provide enough of a moat to make it a solid dividend stock for any retiree's portfolio.
The article 2 Top Stocks for Retirees originally appeared on Fool.com.
Brian Stoffel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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