2 Terrible Stocks for Retirees

By Andrew Tonner Markets Fool.com

Image source: Getty Images.

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Though it might not seem like it, the wisdom of Shakespeare's line from Hamlet "to thine own self be true" applies to investing. As we age, our investment needs change. Recognizing this important truth can make the difference between enjoying a comfortable retirement and having to spend another few years in the workforce.

At younger ages, investors tend to focus on taking on relatively more risk than later in life in hopes of building wealth. As investors near retirement, though, their savings strategy often shifts to emphasize preserving capital, which can mean some stocks are better left avoided. In this article, I will highlight two popular stocks from The Motley Fool universe that retirees should avoid, and distill the broader investing lesson each represents.

Image source: NVIDIA

NVIDIA: Looking beyond the dividend

Any and all income-seeking investors need to remember this phrase: Not all dividends are created equal. Shares of high-flying graphics semiconductor company NVIDIA (NASDAQ: NVDA) are a perfect example of this maxim in practice.

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On the surface, NVIDIA could be seen as an enticing dividend stock. The company's graphics processing units (GPUs) sit at the heart of some of tech's most significant growth markets, the company is in great financial shape to continue to grow its dividend going forward, and it has already nearly doubled its per-share payouts since it initiated its dividend in late 2012.

However, NVIDIA is almost certainly better-characterized as an earnings-growth story first and an income investment second. Its dividend yield still sits at just 0.5%, and its elevated price-to-earnings ratio of 56 is roughly double that of the market averages. NVIDIA is certainly an exceptional company, one younger investors would do well to consider purchasing. However, savers seeking income and stability would probably be better-served deploying their capital toward more mature companies than NVIDIA.

Image source: Netflix

Netflix: Love the company, hate the stock

Netflix (NASDAQ: NFLX) is a classic Peter Lynch stock; Lynch popularized the "buy what you use" philosophy of investing. Given the incredible success of Netflix stock since its 2002 IPO and the company's pronounced brand awareness, retirees or older savers could be excused for considering its shares a shrewd investment. However, the problem with Netflix, or many comparable growth stocks, is that its aggressive valuation and highly volatile trading behavior make it ill-suited for investors focused on capital preservation.

This is all the more unfortunate because Netflix continues to prove doubters wrong by notching one impressive quarterly performance after another. As just one data point illustrates, the company has handily beaten analysts' earnings-per-share estimates in each of its four most recent earnings reports. Netflix is beginning to show signs of maturing as a company, particularly in its now-profitable U.S. segment. The company also remains heavily cash flow negative as it continues to spend hand over first to acquire new content rights, and is highly leveraged as evidenced by its debt-to-equity ratio -- roughly four-- which is largely owing to the company's sizable content liabilities. The overriding lesson here is that well-known and successful stocks might seem like attractive ideas for late-stage savers. However, given these companies' more accentuated risk profile, loss-averse investors would be better-served parking their cash elsewhere.

Foolish bottom line

Hopefully, the Netflix and NVIDIA examples help convey a broader message. Both companies are incredible organizations and certainly fan favorites here at the Fool. NVIDIA's dividend might make it seem appropriate for income investors, and Netflix's long-standing familiarity among many consumers might make it seem less risky than it is. In reality, though, both stocks carry unique risks that are poorly suited for retirees or those nearing retirement.

First impressions only go so far in investing. To truly understand whether a stock meets your needs, you have to delve deeper than a cursory glance. Doing so will also help you avoid taking unnecessary risks with your hard-earned nest egg. So while NVIDIA and Netflix are indeed great stocks, they also nicely embody exactly the kind of characteristics that make them terrible investments for retirees.

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Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Nvidia. The Motley Fool has a disclosure policy.