As investors approach their retirement years it is important to modify their investment portfolio. Risky growth stocks may provide impressive earnings for a younger investor. But a retiree cannot bear the risk of losing part of their portfolio just when they need it the most. Solid investments for retirement should always include dividend stocks but more importantly stocks with long term intrinsic value. Here are a few thoughts on the subject.
Investments for Income in Retirement
A substantial part of any investment portfolio in retirement is typically in dividend stocks. While a person may have reinvested dividends over the years, they will typically take the dividends during retirement. Well-chosen companies with dividend stocks have been paying dividends for decades and steadily increasing the dividends as well. The ability to keep doing this is a measure of the financial health of such an investment.
Healthy dividend-paying companies are not growing rapidly but are generating healthy profits. Passing these on to the stockholder is a way of making up for slowed growth. Some of the highest and most reliable dividends come from utilities which have slow growth, are stable and are financially solvent.
Companies that have been paying dividends for more than a century include the likes of Coca Cola, Exxon Mobile, Procter & Gamble, Colgate Palmolive, and Eli Lilly and Company.
Solid Investments for Retirement
Although dividend stocks are a mainstay of a retirement portfolio, they are not the only stocks you should have. The Motley Fool suggests buying these 3 stocks if you are retired.
While there are thousands of stocks available on the market, not all of them are well suited to help you preserve your retirement savings. But there are also some stocks that are great picks for retirees. If you’re retired, three stocks you should consider buying are Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Brookfield Infrastructure Partners (NYSE:BIP), and Welltower (NYSE:WELL).
These are solid investments for retirement and their reasoning in choosing these three is sound.
Alphabet, Brookfield Infrastructure Partners, and Welltower are very different companies that operate in very different industries. But all three stocks share a common denominator that retirees should look for in any stock that they buy. That common denominator is a strong business model that is built for the long term.
Thus these stocks have long-term intrinsic value and will provide income and growth during retirement. As they point out in the article, Alphabet does not pay dividends but the core company (Google) is a cash cow and the various offshoots that Alphabet is working on such as self-driving cars and artificial intelligence are likely to be winners down the line.
Brookfield Infrastructure Partners owns infrastructure assets in the USA and around the world. They are solvent with a sound business plan and pay a healthy dividend of 5%. For the pros and cons of infrastructure investing read our article.
Welltower is a real estate investment trust (REIT) that stands to benefit from the demographic trend of more seniors with greater health care needs. Investopedia explains requirements for REITs.
- Invest at least 75% of its total assets in real estate, cash or U.S. Treasuries
- Receive at least 75% of its gross income from rents from real property, interest on mortgages financing real property or from sales of real estate
- Pay a minimum of 90% percent of its taxable income in the form of shareholder dividends each year
- Be an entity that is taxable as a corporation
- Be managed by a board of directors or trustees
- Have a minimum of 100 shareholders after its first year of existence
- Have no more than 50% of its shares held by five or fewer individuals during the last half of the taxable year
Equity REITs buy and own income producing properties and make money through management fees and rents. Mortgage REITs provide financing for property owners and operators and their income is derived from the interest rate spread between their cost of funding and interest rates paid for the properties. And, there are hybrid REITs the do both.
Because REIT rules require a diverse ownership, investors are protected from the actions of a handful of investors who might not have everyone else’s interests at heart!
Diversification is Wise
As much as you may be impressed by Alphabet, Coca Cola, Procter & Gamble, or any other investment for retirement, it is not wise to limit your retirement portfolio to one stock. On the other hand, it is also not wise to have a hundred stocks in your portfolio. Smart investors go into retirement with enough stocks to be diversified and a small enough number that they can easily carry out periodic fundamental analysis. You may not change anything in your investment portfolio for years and years but it is wise to make sure that your portfolio does not contain a General Electric which everyone loves but does not grow, or an Eastman Kodak whose business model has become extinct!
It is also wise not to limit your retirement portfolio to one asset class. Typically, retirees will hold part of their assets as stocks, part as bonds, part to be actively managed, and part in an ETF or two with passive management. Our article about how to invest without losing any money is a good resource for part of your retirement portfolio. US Treasuries, AA bonds, or AAA bonds can be laddered in such a way that a retiree can have more cash available for necessities and not just have to rely on dividends and interest payments.
Is any Risk Allowed in a Well-Designed Retirement Portfolio?
Pure speculation with your retirement savings is frankly dumb! But, if you have expertise in a given area and can spot investments with a strong potential, it would be a waste talent not to put a small percentage of your retirement portfolio to work on the potential for dramatic growth. In the end, solid investments for retirement are those with a good business plan and strong intrinsic value. If you can spot that in a small startup, it probably belongs in your portfolio.