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Retirement investing is not what it used to be. In the old days, one could just invest in the “safe” stocks to buy, in “blue chips,” in a nice ladder of bonds, and do just fine.
Alas, the market has significantly changed. Much of this is due to the historically low interest rates we’ve had.
The problem with the Federal Reserve’s attempt to goose the economy is that it killed bond yields, forcing retired investors further out onto the risk curve, making it difficult to find safe stocks to buy. That has pushed stock prices far higher than they should be, if one subscribes (as I do) to the Peter Lynch theory that a stock’s price should reflect its net income growth rate to be added to a list of stocks to buy.
I believe this has created a lot of risk for retired investors when it comes to stocks to buy. There are dividend stocks aplenty, but many of them are priced in such a manner as to create far too much risk.
By Lawrence Meyers
| October 2016
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Mike Mozart via Flickr
When it comes to retirement stocks, I have very firm requirements, which I’ll describe in detail when I launch my stock advisory newsletter, The Liberty Portfolio, early next year. One of those requirements is that the stock must have a 5% yield (give or take) and limited downside. This applies to AT&T Inc. (T), whose current dividend yield is 4.9%.
T stock has several advantages. Although it is loaded with debt, it generates massive cash flow — $35.9 billion in FY15. From that, it ended with about $15 billion in free cash flow, and used $10.2 billion of it to pay the dividend.
I don’t see T stock growing earnings going forward, but in this case, T stock is truly a safe stock because of its cash flow. That will sustain the dividend. T stock itself is in a trading range, and will remain that way for a long time.
swong95765 via Flickr
The world will, as I repeatedly say, always need oil. Energy is a cornerstone of the human experience, and fossil fuels will be the form of energy that carries us into the future. Period. No matter how many people try to knock oil from its pedestal, it will remain on top of the world.
Thus, it follows that companies that are involved with oil will be around for a long time. Frankly, you can go with any of the big producer/explorers. I think, if you want the dividend yield, you can safely go with Chevron Corporation (CVX) and its 4.2% yield.
What we’ve seen from CVX stock over the past couple of years is a good deal of resiliency to the oil price crash. We saw the same from the other big names, and you can certainly go with those, but I think CVX stock has slightly more capital gains potential.
When it comes to no-brainer buys for retirement, there is no conversation to be had unless it includes an insurance stock, and thus I nominate Old Republic International Corporation (ORI).
ORI stock gives us everything we want in an insurance company, including a selection of insurance products that hit all the major revenue generators in the industry.
I personally think you are crazy not to buy an insurance stock that doesn’t have offerings like home warranties, inland marine, worker’s comp, extended warranties for cars and travel accident. Those have the highest margins and contribute big-time to the bottom line.
ORI stock also offers all the staples for businesses, like fidelity insurance, board of directors insurance and the like.
Most importantly, ORI does not discriminate. It offers insurance in all the major economic sectors. I think it is undervalued at its present price and also offers a 4.1% yield.
This article is from Lawrence Meyers of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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