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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| April 2017
The hunt for the best retirement stocks is like the hunt for the best pizza — much of it is a matter of taste. Do you want income or capital appreciation? Large caps or small caps? Safe versus speculative? How about domestic stocks … or are international plays more your style? There’s no “correct” versus “wrong” answer when you consider that retirement could last anywhere from a few to 30 years.
Clearly, bonds and other fixed-income investments should be a consideration in your overall retirement portfolio, but today, I want to address the equity component, whatever percentage you ultimately choose.
Typically, any discussion around retirement stocks usually includes well-known names such as The Coca-Cola Co. (KO), Johnson & Johnson (JNJ) and McDonald’s Corporation (MCD). These are Fortune 500 companies with huge global operations paying healthy dividends yielding 3% or more.
While it’s more than OK to own these types of stocks in your retirement portfolio, sometimes it pays to follow the road less traveled. Contrarian investors like David Dreman made a career (and a fortune) out of doing the unexpected.
To qualify for this list of the best retirement stocks, these picks must yield at least 1.5%, have a market cap of at least $2 billion and recorded an operating profit in each of the past five years. That will help ensure quality. However, these stocks also all have average daily volumes of less than 500,000 — in other words, they’re not widely traded, and as a result, they’re typically not widely covered.
These retirement picks might not be popular in social media, but they’ll get the job done. And that’s the only thing that really matters.
Prices and data are from the original InvestorPlace story published on April 7, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 2.2%
If you have a great-looking lawn at home, it’s probably in part because you or your gardener use one or more products made by Scotts Miracle-Gro Co., an Ohio company that specializes in lawn and garden products.
Fiscal 2016 was a transformational year for Scotts. It undertook Project Focus, a group of initiatives meant to extract value from its non-core assets while doubling down on its U.S. lawn and garden business. Since SMG announced the plan in December 2015, its stock is up 37%.
“I have no beef with the recent performance of the company,” Scotts CEO Jim Hagedorn said announcing Project Focus. “The changes we’re making have little to do with near-term performance. It’s about securing our long-term future.”
Over the past five years, Scotts Miracle-Gro has increased its adjusted income from continuing operations from $104.7 million in fiscal 2012 to $241.1 million in fiscal 2016. In Q1 2017, Scotts Miracle Gro increased revenues by 27% year-over-year while reducing its non-GAAP pro forma loss to 95 cents per share, from $1.13 in the year-ago period.
Don’t be alarmed by the losses, by the way — Scotts traditionally loses money in the first quarter. In fact, despite that Q1 loss in 2016, SMG nearly doubled its profits for the full year, to $315.3 million.
Scotts Miracle-Gro will continue to do well as long as people have lawns that need maintaining. That’s a long time.
Dividend yield: 1.5%
Fomento Economic Mexicano SAB or Femsa for short, is kind of like Coca-Cola, only it has more growth, and it does all of its business outside of the U.S. In fact, the only meaningful source of revenue from America is generated by a 20% stake in Heineken NV (HEINY).
As for Coke, Femsa owns 47.9% of Coca-Cola FEMSA, S.A.B. de C.V. (KOF), the largest franchise bottler of Coca-Cola in the world by volume. Coca-Cola Femsa operates in Mexico, Brazil, Argentina, Colombia, Central America, Venezuela and the Philippines.
Its main business is the 100%-owned OXXO convenience store chain. It operates more than 15,000 stores in Latin America and is one of the largest in the world. (And, of course, you can buy Coke products at all of them.) In 2013, Femsa acquired two Mexican drugstore chains; it now operates more than 1,000 drug stores in Mexico and other parts of South America, and more will open in the years ahead.
This stock has not performed very well in the past five years, but these are stocks that will take care of you in the future. Fomento’s emerging-market exposure will help it outperform the S&P 500 in the years ahead.
Dividend yield: 5.5%
If you’ve been to a movie lately, it’s possible the theater you watched it in is owned by EPR Properties. EPR is a Kansas City-based real estate investment trust (REIT) that specializes in the ownership of movie theaters and other entertainment-related real estate, along with some other interesting investments including the real estate on which 120 schools (public and private) sit.
In case you hadn’t noticed, retailers are getting hammered by the trend toward experiences and away from buying stuff. That’s especially true of the millennial generation, a group of 75 million Americans who value experience over ownership.
Well, experiences are EPR’s wheelhouse. Experience-based real estate is responsible for almost 74% of its revenue, putting this REIT in a prime position to benefit from this trend.
More importantly, EPR is well-managed and had the foresight over the past five years to de-risk its business by reducing its reliance on a few large tenants. In fiscal 2011, its top five tenants accounted for 64% of revenue; today, that’s down to about 45%. AMC Entertainment Holdings Inc (AMC) is currently EPR’s largest tenant, accounting for 20% of its overall revenue.
I first recommended EPR back in April 2013, when its stock traded at $53.27. Today, it sits around $73.75 — 38% gains, and that doesn’t include the healthy 5%-plus dividend yield.
Long-term, I expect EPR to not just outperform the market, but also outperform this group of retirement stocks.
Dividend yield: 2.4%
If you drink rum, there’s a distinct possibility you might get this U.K. medical device company mixed-up with Wray and Nephew, a Jamaican maker of overproof rum now owned by Davide Campari-Milano SpA (DVDCY).
Now that I’ve cleared up any possible confusion, let me tell you why I think you should own Smith & Nephew plc .
The biggest reason to own SNN is that it has been very reliable in paying its annual dividend — for every year since 1937.
Beyond its dividend, Smith & Nephew operates in some very demographic-friendly segments of the healthcare sector, including providing reconstructive hip and knee implants, along with joint repair for sports-related injuries.
As people live longer, the combination of sports injuries due to cardio-related exercise trying to keep old age from setting in — along with people’s joints deteriorating from aging — ensures the company will continue to have a large demographic to pull from.
SNN has seriously underperformed in the past few years, but the company’s move to participate in higher-growth areas of healthcare while building its business in emerging markets should see it revert to the mean in the next few years as operating profits and margins improve.
Dividend yield: 2.3%
Hillenbrand, Inc. has been a separate publicly traded company since 2008, when Hillenbrand Industries was split into two. The medical device business became Hill-Rom Holdings, Inc. (HRC), and the casket business became Hillenbrand Inc.
Hillenbrand, through several acquisitions made since the split, has added a second operating segment that designs and manufactures industrial equipment. Its revenues aren’t growing a whole lot — they remained around $1.6 billion in each of the last four years — but it is doing a good job generating strong operating cash flows from which it pays dividends.
The process equipment group segment has done a good job growing organically, boasting 10% growth in Q4 2016. That acted as a good counterbalance to the Batesville Casket Company, which continues to experience declining sales due to the increase in cremation services rather than traditional caskets.
The company has a one-year total return of nearly 25%, but I want to set expectations here. This stock isn’t going to make you rich — but it will be a fine steward of your retirement nest egg. This company is financially sound, and it will keep paying (and raising) its dividend.
Dividend yield: 2.9%
Cracker Barrel Old Country Store, Inc. doesn’t look great if you look at it through a short-term lens. Its total return of roughly 10% over the past 52 weeks, while respectable compared to its restaurant peers, seriously trails the S&P 500.
It’s not even the relative lack of performance versus the index, it’s the volatility — a $45 spread between its 52-week high of $175.04 and $130.15 low — that would give one second thoughts.
However, looking farther back, Cracker Barrel has seriously outperformed both its peers and the index on an annual basis over the past five years. And it has done so while carrying on an ongoing spat with its largest shareholder, Biglari Holdings Inc (BH), who has profited greatly under the leadership of Cracker Barrel CEO Sandy Cochran.
One of the more interesting aspects of Cracker Barrel — beside the fact it combines a retail shop with a dining room — is that four of the top executives at the company, including the CEO, are women. That’s a big plus in my mind given there’s significant data showing women CEOs do better for shareholders than their male counterparts.
I’ve liked Cracker Barrel since 2013, and nothing has changed to alter my opinion.
People have to eat.
Dividend yield: 4.6%
The word “infrastructure”pretty much says it all.
President Donald Trump campaigned on the promise of rebuilding America’s infrastructure, and while many of the company’s assets aren’t in the U.S., Brookfield Infrastructure Partners L.P. understands these types of investments better than most.
The company’s strategy is simple: Acquire good infrastructure assets at value prices, then sell them when they’ve become expensive. Since 2008, BIP has managed to generate a compound annual return of 15% by doing just that.
Recently, Brookfield Infrastructure announced that it was close to acquiring a water irrigation system in Peru for $15 million. It’s buying Latin American assets because they’re cheap (investors might want to consider emerging-market stocks and ETFs) while the hurting economies in Brazil and in other South American countries are starting to improve.
Get in on the ground floor.
It doesn’t hurt that BIP is majority-owned by Brookfield Asset Management Inc (BAM), one of the best asset managers in the world. BAM has a dividend yield of 1.5%, so I opted to recommend BIP. But if you’re OK with your returns coming in the form of capital appreciation, Brookfield Asset Managment could treat you just fine.
BIP is one of the best retirement stocks you can buy. There’s not really much else to say.
This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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