Younger investors can chase risky growth stocks, but that strategy stops making sense as your retirement approaches. The best way to manage your nest egg after retirement is to focus on risk-free investments with high and rising dividend payments.
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To help you find stocks that fit that bill to a T, we asked a handful of investors at The Motley Fool to share their best ideas.
Read on to see why they recommend owning International Business Machines (NYSE: IBM), Kinder Morgan (NYSE: KMI), and Medtronic (NYSE: MDT) in your golden years.
A numbers game that retirees can win
Sean Williams (Medtronic): While there's no such thing as a surefire investment, one stock that retirees should consider that delivers a superior dividend and solid long-term growth prospects is medical device giant Medtronic.
What Medtronic brings to the table is a genuine chance to win a long-term numbers game. According to the U.S. Census Bureau, the number of elderly Americans aged 65 and up could nearly double from 48 million to 88 million between 2015 and 2050. This means people will be living longer than ever, and they'll probably need more surgeries to improve their quality of life, too, ranging from restorative therapies to cardiovascular implants. Medtronic, one of the largest medical-device makers in the world, is perfectly positioned to step up and take advantage of this jump in the elderly population in the decades to come.
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Medtronic also has a key focus on improving its growth and presence beyond traditionally developed markets. The company's first quarter report for fiscal 2018, released last month, showed that emerging market revenue now comprises 14% of total sales, and it was up 12% on a constant currency basis over Q1 2017. A more globally diversified business should give Medtronic the opportunity to improve on its roughly 5% annual growth target, and to avoid big sales swoons when recessions hit.
The company is also at the forefront of a number of new innovations. In particular, the MiniMed 670G is the world's first artificial pancreas, and could very well become a life-changing insulin-administration device for the more than 1.2 million people with type 1 diabetes in the United States. Among cardiovascular, spinal, and diabetic devices, there may arguably be no more impressive company than Medtronic.
The icing on the cake is that Medtronic has increased its annual dividend payout for 40 consecutive years, placing it among an elite group of income stocks known as Dividend Aristocrats, which have upped their annual payouts for a minimum of 25 straight years. Sporting a 2.3% yield, Medtronic is a stock that retirees should give strong consideration to owning.
Big Blue: Different, but still a great long-term bet
Anders Bylund (IBM): It might not be the IBM you grew up with, but this evolving version of Big Blue will remain a dividend-paying machine for decades to come.
Under CEO Ginny Rometty's guidance, IBM is reshaping its business model once again. From typewriters and punch cards to mainframes and PC systems, then onward to becoming the one-stop shop for business-grade computing tools, IBM has always been quick to adapt to the changing business environment. This time, the company is refocusing around artificial intelligence, cloud computing, social networks, and mobile technologies. This is where the computing industry is moving as a whole, and IBM wants to lead the charge.
The transformation has required Rometty to make some difficult changes. Computer systems, storage hardware, and other low-margin operations with questionable growth prospects have been sold off, piece by piece. Revenues have declined under this relentless reshaping process, and investors are losing patience with the whole makeover. IBM's share prices have fallen 27% lower over the last five years, missing out on broader market gains. The S&P 500 index gained 75% over the same period.
These strategy shifts can take time, but I'm convinced that IBM is heading in the right direction. Meanwhile, investors can pick up shares at a P/E ratio of just 11.9 times trailing earnings, locking in dividends at a 4.2% yield. That's a fantastic deal for a tech giant with proven long-term resilience and a fantastic commitment to delivering shareholder value.
This is the kind of bet you want to make when long-term dividend muscle outweighs all other concerns. And it doesn't hurt that the shares themselves are beyond affordable right now, in case you're looking to pocket larger profits from stock sales later on.
The total package
Matt DiLallo (Kinder Morgan): Natural gas pipeline giant Kinder Morgan has struggled during the oil market downturn. That's partially due to its direct exposure to oil prices as well as its high debt levels heading into the crisis. But the company has undertaken several initiatives to improve its financial situation, which suggests brighter days are ahead for the natural gas pipeline giant.
One reason retirees should consider investing in Kinder Morgan is that it's about to become a power house income stock. While the company currently yields a rather unappealing 2.6%, the pipeline giant recently unveiled plans for a monster 60% dividend increase for 2018 with intentions on increasing it by 25% in both 2019 and 2020. That implies a forward yield of 6.5% for investors who buy today. Further, the company can already support its 2020 dividend level, as that implied future rate would consume less than 65% of 2017's distributable cash flow.
Still, Kinder Morgan expects earnings and cash flow to increase over the next few years because of projects it currently has in the pipeline. Overall, the company has $12.2 billion of capital projects in its backlog, the bulk of which are fee-based pipelines and terminals. According to the company's projections, these projects should grow its earnings stream by more than 20% over the next five years, which provides further support for its dividend. Meanwhile, the industry needs to invest about $26 billion annually on new energy-related infrastructure through 2035, which should provide additional expansion opportunities for Kinder Morgan.
What's even better about Kinder Morgan is that retirees can purchase the company's growing income stream for a value price since it sells for less than 10 times current cash flow these days, which is well below the mid-teens multiple that most of its peers fetch. That total package of growth, income, and value is why retirees should seriously consider owning Kinder Morgan for the long haul.
10 stocks we like better than IBM
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*Stock Advisor returns as of September 5, 2017
Anders Bylund owns shares of IBM. Matthew DiLallo owns shares of Kinder Morgan and Medtronic and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool also owns shares of Medtronic. The Motley Fool has a disclosure policy.