3 Awful Stocks for Retirees

Even once you've retired, there's a place in your portfolio for stocks. This is especially true if you expect to have a long retirement, or if you wish to leave a legacy to your children or favorite charity.

Still, not every stock is appropriate for a retiree's portfolio. For instance, stocks that pay no dividends, have no clear underpinning of value from cash flows or balance sheet strength, or have no sustainable competitive advantage, are far too speculative to fit in most retirees' portfolios. That's true even if they'd be reasonable investments for those still working. Keep on reading to find out what makes the following three companies awful stocks for retirees to own.

A giant retailer priced for continued rapid expansion

Amazon.com, Inc. (NASDAQ: AMZN) is a titan among retailers, rapidly becoming one of the largest merchandise sellers around. The company's growth has been stellar, and the stock market has rewarded it with a market cap of nearly half a trillion dollars.

Yet the market's valuation for Amazon.com is well ahead of other retailers, trading at more than three times trailing revenue and around 180 times trailing earnings. Compare that with fellow retail titan Wal-Mart Stores, Inc. (NYSE: WMT), which trades at less than half its trailing revenue and around 17 times trailing earnings, and it becomes clear just how much further growth is priced into Amazon.com's shares.

Can Amazon.com grow into its market capitalization? Perhaps, but investors buying today need Amazon to not only grow into today's market price, but continue growing well past it in order to profit from the fundamental value behind their investment. For retirees who needs to live off of their portfolios, that's a bit too much hope for a rosy future embedded in today's price to justify buying its shares.

A death-care business with a potentially unsustainable dividend

StoneMor Partners (NYSE: STON) operates in the funeral industry, operating 316 cemeteries and 100 funeral homes throughout the United States and Puerto Rico. Death care is (fortunately) not known as a fast-growing industry, and as such, a decent dividend yield can reasonably be expected. With a yield of nearly 14%, however, StoneMor Partners' dividend has jumped past "decent" and well into the "downright dangerous" level.

When a company's cash distribution is well above normal for its industry, it's frequently a sign that it's at risk of being cut. StoneMor Partners already slashed its distribution last October, and it's well behind on publishing its annual and quarterly financial statements. Even with that payment cut, StoneMor Partners' distribution isn't covered by its operating cash flows, which is another sign that its distribution may still be at risk.

When a company cuts its dividend, its share price frequently falls. That's a double whammy, as shareholders lose both some of their current investment income and much of the capital they had invested in the company, making it much more difficult to make up the income elsewhere. With its 2016 cut, StoneMor Partners' shares sunk, and if it's forced to cut its distribution again, its shares may, once again, fall on the news.

That risk of yet another dividend cut -- and the stock-price risk that goes along with it -- is just too large for StoneMor Partners to deserve a place in a retiree's portfolio.

A debt servicer that looks "cheap" for a very good reason

Ocwen Financial (NYSE: OCN) is a mortgage loan originator and servicer that's gotten into serious legal trouble for its servicing practices. In large part because of that legal trouble, it has been hemorrhaging money, reporting staggering losses over the past several years.

Yet despite that risk, there's a glimmer of potential value in its shares -- for investors who have a very high-risk tolerance and are incredibly patient. Ocwen Financial's stock trades at less than 0.6 times its book value and at about one times its trailing-four-quarters' cash from operations. If the company survives its legal troubles and manages to stave off bankruptcy while doing so, its shares could potentially spike upwards simply on the news of its survival.

Still, for retirees living off their portfolios, the very real risk of Ocwen Fiancial's potential bankruptcy overshadows the potential rewards if it survives. As retirees can't easily replace money lost in a speculative investment like this one should it go wrong, their money belongs in investments with a higher probability of survival.

Retirees deserve to own great businesses at reasonable prices

Most retirees should still own stocks to help fight inflation over time and cover their longer-term future financial needs. The right companies for retirees to own are those that:

  • Look reasonably valued based on what they're delivering today (unlike Amazon.com)
  • Pay supportable dividends (unlike StoneMor Partners).
  • Show a clear path to remaining operational (unlike Ocwen Financial)

Retirees need their stock investments to provide reasonable potential rates of return in exchange for reasonable levels of risk. Knowing what to avoid in investments can go a long way toward helping retirees assure the stocks they do hold in their portfolios are appropriate fits for their particular stages in life.

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Chuck Saletta has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Ocwen Financial. The Motley Fool has a disclosure policy.