2 Top Stocks for Retirees

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After you retire, your investment goals generally shift away from growth and speculation in order to focus on income and capital preservation. However, the right stocks can provide you with a strong income stream and allow for significant growth potential, all while letting you sleep at night knowing that your investment is safe. With that in mind, here are two great income stocks for retirees, both of which I own in my own retirement account and plan to keep for decades.

Healthcare real estate for income and growth

There are several compelling reasons to invest in healthcare real estate. Now that it's shed its most unstable assets, HCP (NYSE: HCP) could be a great way for retirees to take advantage.

Since its recent spinoff of its skilled nursing and post-acute assets into the newly created REIT (real estate investment trust) Quality Care Properties (NYSE: QCP), HCP's portfolio is mostly composed of senior-housing, life-science, and medical-office properties, nearly all of which are private-pay (read: stable and predictable). The company has about 800 properties in its portfolio, spread out among 43 states.

Source: HCP investor presentation.

Why healthcare? A few reasons. First, the healthcare real estate industry is highly fragmented, with even the largest REITs holding just a 3% market share. This translates to lots of opportunities for consolidation within the existing market.

More importantly, the U.S. population is aging rapidly, with the senior-citizen (65+) population expected to roughly double by 2050. Seniors spend five times as much on healthcare per person as the overall population, which translates to rapid growth in the most lucrative part of the healthcare market. This is especially good for HCP, since senior housing is the company's largest property type.

As of this writing, HCP pays a 5% dividend yield and trades for a low multiple of 15.3 times 2017's expected AFFO (adjusted funds from operations) of $1.92 per share. And since this is substantially higher than the company's current $1.48 annual payout, income investors shouldn't worry about the dividend's safety going forward.

Monthly income and strong returns

Leading freestanding retail REIT Realty Income (NYSE: O) is a favorite among income investors because of its 4.3% dividend yield, paid out in monthly installments. I like it for retirees because of its low-risk strategy and high potential for returns.

Specifically, virtually all of Realty Income's retail properties are either competition-resistant or recession-resistant (or both). Just to name a few of Realty Income's largest tenants: Walgreens sells goods that people need, no matter what the economy is doing. Dollar General and other dollar-store brands actually tend to do better in tough economic conditions, and often offer deals that even the largest online competitors can't match. And LA Fitness is a business people need to go to in person, which makes it immune to the threat of e-commerce stealing its market share.

Image source: Realty Income investor presentation.

Furthermore, Realty Income's lease structure is designed to eliminate unpredictable expenses, keep occupancy high, and steadily grow the revenue stream. Tenants sign a type of lease known as a "net lease," which shifts the variable costs of property ownership to the tenant, including property taxes, hazard insurance, and building maintenance. These leases come with initial terms of 15 to 20 years, and typically have annual rent increases built in. All Realty Income has to do is collect a rent check. This long-term net lease structure is a big reason why Realty Income's properties have never fallen below 96% occupancy.

Image source: Realty Income investor presentation.

Because of the combination of rental income and property-value appreciation, the company has produced some impressive returns for its investors. Since its 1994 NYSE listing, Realty Income has averaged a total return of 17.9% per year -- a total of more than 3,700% in 22 years. I'm not saying that this level of performance will continue, but I don't see any reason to believe the company can't beat the returns of the market going forward.

Diversification is the most important thing for retirees

High-quality REITs like these two make excellent investments for retirees because of their high income potential and low-risk property types. However, when investing in stocks after retirement, diversification is perhaps the most important part of your investing strategy.

The REIT sector is an excellent example of why. Over the past few months, speculation that the Federal Reserve will begin to normalize interest rates has increased significantly. Higher interest rates are generally bad for REITs, which is a big reason that the sector has fallen by about 13% since August, even though major market indices are near record highs.

The point is that retirees shouldn't rely too much on any one type of stock. These are excellent choices from the real estate sector, but you should diversify into stable industry-leading companies from other sectors as well.

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Matthew Frankel owns shares of HCP and Realty Income. The Motley Fool has no position in any of the stocks mentioned. 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.