It was a year to remember, but in the wrong way. That S&P500, which is often considered the best barometer of stock market health, delivered its worst first half-year return since Richard Nixon was president. In addition, technology is dependent Nasdaq Compositewhich was instrumental in propelling the market to new highs over the past year has plummeted firmly into a bear market.
While times of heightened volatility and uncertainty are worrying for all layers of investors, it can be a particularly difficult time for retirees. People who have hung up their work jackets forever may not be able to cope with significant falls in their investment.
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But there is a bright spot amid this turmoil for retirees. Bear markets have a long history of rolling out the red carpet for patient investors – young and old. Every single double-digit percentage drop in major US indexes throughout history has eventually been reversed by a bull market rally. In other words, every bear market is a real buying opportunity.
Best of all, retirees don’t have to chase highly volatile growth stocks to see significant returns. A number of rock solid companies with relatively low volatility are now ripe for selection by older investors. What follows are three perfect stocks for retirees who can turn $300,000 into $1 million by 2030.
Partner for Enterprise Products
The first ideal stock for retirees that has the potential to produce a total return of at least 233% by 2030, including dividends paid, is energy stocks Partner for Enterprise Products (EPD -1.71%).
Admittedly, the idea of investing in an oil stock may not sound particularly palatable to retirees. Oil and natural gas demand fell off a cliff in the early stages of the pandemic, sending West Texas Intermediate crude oil futures (very briefly) to minus $40/barrel. This historic volatility is probably still fresh in the minds of retired investors.
However, Enterprise Products Partners is a different animal altogether and has been virtually unaffected (on an operational basis) by the pandemic. That’s because it’s a midstream energy company. Midstream providers are effectively energy intermediaries that help move crude oil and natural gas from wellsites to storage tanks or processing plants. In the case of Enterprise Product Partners, the company owns over 50,000 miles of transmission pipelines, 14 billion cubic feet of natural gas storage, 19 deep sea docks and 24 natural gas processing facilities.
The beauty of midstream energy companies is that virtually all use fixed-price or volume-based contracts. Structuring contracts in this manner eliminates the volatility associated with oil and natural gas price swings and makes Enterprise Products’ operating cash flow highly predictable. This cash flow predictability is important because it allows the company to spend capital on infrastructure projects and acquisitions without impacting its quarterly payout (ie, dividend) or profitability.
Additionally, Enterprise Products Partners’ Distribution Coverage Ratio (DCR) never fell below 1.6 during the worst of the COVID-19 pandemic. The DCR is the amount of distributable cash flow from operations relative to what was actually paid to shareholders. A number at or below 1 would signal an unsustainable payout.
The icing on the cake? The company has increased its annual base payout for each of the last 24 years and currently projects an absolute sustainable return of 7.1%.
alphabet
A second perfect stock for retirees that can turn an initial investment of $300,000 into $1 million in eight years is FAANG stock alphabet (GOOGL -0.11%) (WELL -0.26%)the parent company of internet search engine Google, streaming platform YouTube and autonomous vehicle company Waymo, among others.
Alphabet is a great example for retirees that dividends aren’t necessary to grow your nest egg. While dividend stocks tend to be mature, proven companies with generally low volatility, retirees can get low volatility and significantly juicier growth prospects from a company like Alphabet.
Alphabet’s foundation has long been its Internet search engine, Google. If we look back several years, data from GlobalStats shows that Google controlled between 91% and 93% of the world’s internet search share. With an 88 percentage point lead over its nearest competitor, Google has become a true monopoly and therefore has strong pricing power over the placement of ads. That competitive advantage (ie, cash cow business segment) isn’t going away anytime soon anyway.
But what’s really exciting is watching Alphabet channel its incredible cash flow from Google into other fast-growing areas. For example, YouTube is the second most visited social media site in the world with 2.48 billion monthly active users. With so many eyeballs watching videos, YouTube has delivered solid subscription growth, generating nearly $30 billion in annual run-rate revenue from ads.
Alphabet’s investments in Google Cloud should also pay off sooner rather than later. Although we’re still in the very early innings of cloud services growth, Google Cloud grabbed 8% of global cloud spending for the second quarter, according to a Canalys report. Though this is currently a loss-making segment, the high margins associated with cloud services should play a role in helping Alphabet double its operating cash flow over the next four years.
If those competitive advantages aren’t enough, consider that Alphabet is now cheaper than ever as a public company — a price-to-earnings multiple of less than 18 for the year ahead. It’s rare for investors to find such a high-quality company with such a relatively low earnings multiple.
Image source: Getty Images.
Visas
The third perfect stock for retirees that can turn an initial investment of $300,000 into $1 million by 2030 is Payment Processor Visas (v -1.06%).
The big concern Wall Street has with payment processors right now is how they will behave when inflation hits a four-decade high and US gross domestic product (GDP) falls for consecutive quarters. Because financials like Visa are cyclical, they tend to be weak during contractions and recessions.
However, the business cycle is a two-sided coin that greatly favors the optimist. While recessions are inevitable, they typically don’t last more than a few quarters. By comparison, virtually all economic expansion has been measured in years. A bet on Visa is simply a bet that US and global GDP, and therefore consumer and corporate spending, will increase over time (which is a virtual guarantee).
Not only will retirees play a numbers game to their advantage, but they’ll also appreciate Visa’s leadership in the US – ie the world’s leading consumer market. As of 2020, Visa held a 54% share of the credit card network’s purchase volume and was the only major payment processor to significantly increase its share of the credit card network’s purchase volume after the Great Recession.
In addition, this is a company with many opportunities beyond the US borders. With most global transactions still being processed with cash, Visa can choose to expand its payments infrastructure organically in regions of the world with underserved banks, or make acquisitions to expand its footprint, as it did with the 2016 buyout of Visa Europe.
But the real secret to Visa’s success may just be management’s financial discipline. Visa acts solely as a payment processor and does not issue loans. Although it could very easily generate interest income and fees as a lender, doing so would expose it to potential credit losses during recessions and would require it to set aside capital to cover those credit losses. Because Visa doesn’t lend, it’s not required to take these safeguards, and as a result, it recovers from recessions much faster than other financial stocks.
Finally, keep in mind that while Visa’s 0.75% dividend yield doesn’t have much to offer on a nominal basis, the company has increased its quarterly payout by more than 1,300% since it paid its first quarterly dividend in 2008.
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