Top Stocks to Buy in Retirement

By Brian Stoffel Markets Fool.com

Image credit: Getty Images

Continue Reading Below

Retirement is the time you've earned to pursue your passions, spend time with the ones you love, and treat your mind and body with care. The last thing you want to do is waste time and energy worrying about money. That's why it's so important to buy top-quality retirement stocks for your nest egg -- and then just let them be.

Most articles of this type will focus on consumer-goods companies that provide stuff that you use and need on a daily basis. I'm talking about Johnson & Johnson-- the medical conglomerate that provides everything from Band-Aids to Tylenol to breakthrough drugs -- or General Electric. And while I certainly do think these make fine retirement stocks -- and I certainly will be including one stock of the ilk -- I will also be breaking with tradition somewhat.

For investors who are just nearing -- or entering -- retirement and will count on their nest eggs for a number of decades, I have selected two stocks with (1) huge moats surrounding their business, (2) extremely solid balance sheets, and (3) the potential to offer solid dividends.

Let's start with a tried-and-true stalwart

To start with, we have Procter & Gamble (NYSE: PG), owner of 22 brands with over $1 billion in global annual sales (Gillette, Duracell, Bounty, Tide, and so on), and another 19 that bring in at least $500 million annually (among them NyQuil, Febreeze, Prilosec).

Continue Reading Below

The power of those brands alone should be enough for retirees to consider putting P&G stock in their portfolio. Given the company's recognizable and trusted products with a global reach, customers are willing to pay slightly more for the quality that they have become accustomed to. This advantage allows P&G to incrementally raise prices, outpacing and outperforming its rivals.

But the company's dividend is also worthy of praise. Currently yielding 3.2%, P&G's record of increasing free cash flow (FCF) gives me confidence that the payout is both safe and has room for growth. In fact, management has increased the company's dividend for 62 straight years.

To get a better idea of how it does this, look at the company's FCF and dividend payments since 2010.

P&G FCF and Dividends
Create column charts
Data source: SEC filings.

Even during the tightest year -- which started in the summer of 2013 -- the company used only 69% of its FCF to pay the dividend. To me, that makes it a very safe pick.

The largest moat ever seen?

While the investing duo of Warren Buffett and Charlie Munger have built a fortune at Berkshire Hathaway, they have traditionally shied away from technology companies. That didn't stop the two from saying in 2009:

Google has a huge new moat. In fact I've probably never seen such a wide moat. I don't know how to take [the moat] away from them. Their moat is filled with sharks!"

The crazy thing is that in the intervening seven years, Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) moat has only widened. The company has seven products with over a billion active users. That reach has allowed the company to compile an unmatched treasure trove of data that advertisers are willing to pay top dollar for.

But what about a dividend? The company doesn't pay one -- yet. But look at the cash on hand (including long and short-term investments), as well as the FCF the company has generated over the past four years, and it's not too hard to imagine a future where a payout was included.

Alphabet's Growing Cash Stash
Create column charts
Data source: SEC filings.

To put this in perspective, if Alphabet decided to use half of its cash to pay a special dividend, it would yield $129 per share, or about a 16% yield. Even if it used only half of its FCF -- a much more likely scenario -- it would yield $34 per share, or 4.3%.

There's no guarantee that this will happen. But the company is investment-worthy even without a dividend, so any potential payments in the future can be viewed as purely icing on the cake.

The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Alphabet (A shares) and Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Berkshire Hathaway (B shares). The Motley Fool owns shares of General Electric. The Motley Fool recommends Johnson and Johnson. 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.