Especially if you're behind the curve on your retirement savings, your 40s is an incredibly critical decade for your investment plan. You're still young enough to invest aggressively and let compounding do much of the heavy lifting to get you to a comfortable retirement. At the same time, though, you're not so young that your portfolio can easily recover from a major stumble.
As a result, you want companies with a good combination of potential growth ahead of them and reasonable valuations when you buy them today. The potential growth is what enables the market's compounding engine to power future returns, while the reasonable valuation is what protects you from temporary corporate stumbles along the way. These three stocks fit that bill, which makes them worthy of consideration for your portfolio.
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A generic drug maker where the market has low expectations
Many companies talk about helping to lower healthcare costs, but Mylan Laboratories (NASDAQ: MYL) has actually done something about it. As a leader in generic medications -- going back to generic penicillin in 1966 -- Mylan Laboratories earns a substantial part of its revenue by cutting the costs of medications as they come off patent protection.
That's an important business. People need medicines, after all, and a generic manufacturer can offer those medications at a substantially lower price since it doesn't have heavy research costs to cover. Despite being part of that critical industry, Mylan Laboratories trades at a mere seven times its expected earnings. Those earnings are expected to grow by around seven percent annualized over the next five years, which makes its shares available at a reasonable bargain if those earnings materialize.
A pipeline giant that has officially turned the corner in its recovery
Back in late 2015, energy pipeline giant Kinder Morgan (NYSE: KMI) saw its shares tumble as it cut its dividend in response to a threatened reduction of its debt rating. The company took the next few years to shore up its balance sheet and switch to funding much of its expansion capital needs from internal cash flows instead of relying on the debt market.
Around the middle of 2017, Kinder Morgan announced that its plans were on track and that by 2018, it'd be able to resume increasing its dividend. Sure enough, earlier this month, the pipeline giant made it official with a 60% dividend hike. Despite that clear-cut sign of a return to health, Kinder Morgan's shares are still well below their 2015 highs.
With the dividend expected to continue aggressively rising for the next couple of years, and double-digit earnings growth expected over the next five years, Kinder Morgan is certainly worth consideration.
A rock-solid insurance giant available at a bargain price
Prudential Financial (NYSE: PRU) takes such pride in its rock-solid financial condition that it uses an actual rock -- the Rock of Gibraltar -- as its corporate symbol. Prudential Financial backs up that claim with a balance sheet that has more cash, cash equivalents, and short-term investments than total debt on it. It also claims a debt-to-equity ratio around 0.6 and a current ratio around 1.0 , which are further signs of a solid financial condition.
Despite that incredible stability, Prudential Financial trades at a bargain-basement price. Its shares trade at less than 0.9 times its book value and at a single-digit price-to-earnings ratio whether you consider its trailing earnings or its forward-looking anticipated earnings. With earnings expected to grow by over 10% annualized over the next five years, that's an incredible bargain for a very solid company.
On top of that value and growth potential, Prudential Financial pays a solid dividend with a 3.4% yield that only represents around 17% of its earnings. Of course, the insurance industry often goes through periods of earnings contractions since the risks they insure aren't always predictable. Still, with such a reasonable payout ratio and solid balance sheet, investors have a strong chance at both dividend income and growth over time.
A recipe for success for a 40-something investor
Kinder Morgan, Prudential Financial, and Mylan Laboratories all operate in different business lines, but what they share in common is that they're trading at reasonable values given their prospects. That gives an investor the potential to participate in the wealth-generating growth the market typically offers over time, while still offering some cushion if the future doesn't turn out as well as anticipated.
That combination gives you as a 40-something investor the opportunity to start catching up on your retirement savings. Your 40s can be your last great chance for compounding to do most of the heavy lifting to get you to a comfortable retirement. Owning solid, growing companies available at reasonable valuations can give you a great chance of ultimately reaching your retirement goal.
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Chuck Saletta owns shares of Kinder Morgan and Prudential Financial and has the following options: long January 2020 $20 calls on Kinder Morgan, short January 2020 $20 puts on Kinder Morgan, and short June 2018 $18 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.