Those who are just entering retirement or are within 10 years of retiring still need some stock exposure so that they don’t outlive their money. If you are between the ages of 55 and 65 and are healthy, you can expect to live another 20 to 30 years or more. With interest rates at historic lows, income investors will need to look to stocks to produce income that will outpace inflation and the cost of living for the remainder of their lives. I have compiled a list of 5 stocks that can make up a small percentage of a portfolio for those who qualify for the ‘senior discount’ or for those who want to invest conservatively.
The key is to pick stocks that have little downside risk so that your principle is preserved, while income is produced. These 5 stocks have betas under 0.70, which means that the stocks are not as volatile as stocks with betas over 1. They all pay dividends, which can produce the extra income needed by those entering retirement.
General Mills (GIS) the major manufacturer of food products pays a 3.1% dividend. It has paid dividends uninterrupted and without reduction for 113 years – now that’s consistency. Its performance should remain as consistent, as consistent as our need for food. It has a very low beta of 0.21, which keeps the stock steady to preserve your capital. General Mills stock is currently trading just under 4 times book value per share which makes it fairly valued. It has grown earnings at 10.16% annually for the last five years and is expected to grow earnings annually at 7.93% for the next five years. Although General Mills has challenges with rising food and energy costs, it should still remain a steady performer with a strong line of new products and marketing initiatives.
McDonald's (MCD) the famous fast-food restaurant with the golden arches also yields a 3.1% dividend. McDonald's has increased its dividend every year since its first one in 1976. Its beta is low at 0.36, therefore it is not volatile and has a low downside risk. Its stock has just recently made a new 52 week high, breaking past $90 per share on third quarter earnings strength. It reported a 12% increase in earnings over the second (previous) quarter. McDonald's has grown earnings annually at 15.73% for the past five years and is currently expected to grow at 10% annually for the next five years. Its estimates are expected to be revised in the next few days due to a strong outlook.
The company has been making smart menu changes with its McCafe line of coffee and smoothie products, Angus burgers, dollar menu promotions, the McRib, wraps, and various chicken sandwiches. McDonalds had proven to do well over time in good times and in bad and I’m confident that it will continue to do so.
International Business Machines (IBM) pays a dividend of 1.7% and has a beta of 0.69. Big blue has made intelligent business decisions by entering the information technology field when sales of its hardware were declining. With a forward PE ratio of 12.21 and a PEG of 1.1, IBM is well valued. IBM has grown earnings annually at 17.13% the last five years and is projected to grow them at 12.09% annually for the next five years. IBM has met third quarter 2011 earnings expectations reporting earnings per share of 3.28 which is up 15% year over year. Revenue rose 8% from a year earlier. It continues to benefit from consistent enterprise spending on its hardware and software for giant data centers powering the internet. IBM raised its outlook for 2011, expecting EPS of at least $13.15.
Coca Cola (KO) is Warren Buffett’s largest holding. It pays a 2.8% dividend and has a beta of 0.59. Coke has increased its dividends for 49 years in a row. It doesn’t look well valued if you only look at the forward PE of 16.35 and the PEG of 2.19 - however, the stock is trading at only 4.45 times book value per share which is nicely valued. Its consistency is found in its earnings: Coke has grown earnings annually at 8.79% the past five years and is expected to grow earnings annually at 8% for the next five years. Coca Cola is much more than the drink by the same name – the company owns over 450 brands throughout the world.
Coke has reported a third quarter earnings increase of 8.1%, even taking some market share away from Pepsi (PEP). Coke is facing higher commodity costs but it is also using favorable foreign exchange rates to act as a counterbalance over time. Its steady, consistent, low-risk performance will continue many years into the future.
Wal-Mart (WMT) pays a 2.6% dividend and has a low beta of 0.39. It is undervalued with a PE ratio of 11.62 and a PEG of 1.34. Its stock trades at only 2.89 times its book value per share. Wal-Mart is another consistent earnings grower: it has grown earnings annually at 9.37% the past five years and is expected to grow earnings annually at 9.4% for the next five years.
Wal-Mart’s growth is now coming primarily from outside the U.S. It is also focusing more on groceries, where it now gets 50% of its revenue, giving it an edge over internet retailer, Amazon (AMZN). With Wal-Mart’s steady growth and low cost philosophy, it should remain a leader in the retail industry.
These companies are steady, consistent growers that can provide dividend income combined with healthy stock appreciation. Think about the total annual yield when looking at these stocks. For example, IBM’s dividend of 1.7% may seem small, but when added to their 5 year expected earnings growth of 12.09%, its total annual yield should equate to 13.79% annually. The other important consideration is the low risk factor of these stocks. The downside is limited over the long term which is a key factor for those who are looking for a conservative portfolio of stocks.