It’s been a memorable year, but in all the wrong ways. The S&P500, which is often considered the best barometer of stock market health, posted its worst first-half performance since Richard Nixon was president. To start, the dependent technology Nasdaq Compoundwhich has been largely responsible for driving the market to new highs over the past year, has plunged firmly into a bear market.
While times of heightened volatility and uncertainty are disconcerting for all walks of life, it can be a particularly trying time for retirees. People who have permanently hung up their work coats may not be able to sustain significant declines in their primary investment.
But there is a silver lining amidst this turmoil for retirees. Bear markets have a rich history of rolling out the red carpet for patient investors, young and old. Every double-digit percentage decline in major US indexes in history has finally been erased by a bull market rally. In other words, every bear market is a real buying opportunity.
Best of all, retirees don’t have to seek out highly volatile growth stocks to generate meaningful returns. A number of rock-solid, reasonably low-volatility companies are ripe for choice by older investors right now. Here are three perfect stocks for retirees that can turn $300,000 into $1 million by 2030.
Enterprise Product Partners
The ideal first stock for retirees to buy and likely to generate a total return of at least 233%, including dividends paid, by 2030 is energy stock. Enterprise Product Partners (EPD -1.71%).
Admittedly, the idea of investing in an oil stock might not seem acceptable to retirees. Demand for oil and natural gas fell off a cliff during the early stages of the pandemic, causing West Texas Intermediate crude oil futures (very briefly) to drop to negative $40/barrel. Such historic volatility is likely still fresh in the minds of retired investors.
However, Enterprise Products Partners is a completely different beast and has been largely unaffected (on an operational basis) by the pandemic. This is because it is an intermediate energy company. Midstream suppliers are actually energy intermediaries that help crude oil and natural gas get from drilling grounds to storage reservoirs or processing plants. In the case of Enterprise Product Partners, it owns more than 50,000 miles of transmission pipeline, 14 billion cubic feet of natural gas storage space, 19 deepwater docks and 24 natural gas processing facilities.
The beauty of midstream energy companies is that virtually all use flat-rate or volume-based contracts. Structuring contracts in this manner eliminates the volatility associated with fluctuations in oil and natural gas prices and makes Enterprise Products’ operating cash flows highly predictable. This cash flow predictability is important because it allows the company to disburse capital for infrastructure projects and acquisitions without hurting its quarterly distribution (i.e. dividend) or profitability. .
Additionally, Enterprise Products Partners’ payout coverage ratio (DCR) never dipped below 1.6 during the worst of the COVID-19 pandemic. DCR is the amount of distributable cash flow from operations relative to what was actually paid out to shareholders. A number of 1 or less would signal an unsustainable payout.
The icing on the cake? The company has increased its base annual distribution in each of the past 24 years and is currently looking at a fully sustainable yield of 7.1%.
A perfect second stock for retirees to buy that can turn an initial $300,000 investment into $1 million in eight years is FAANG stock. Alphabet (GOOGL -0.11%) (GOOG -0.26%)the parent company of internet search engine Google, streaming platform YouTube and self-driving vehicle company Waymo, among others.
Alphabet is a great example for retirees that dividends aren’t necessary to grow your nest egg. While dividend-paying stocks are generally mature, proven companies with generally low volatility, retirees can get low volatility and dramatically juicier growth prospects from a company like Alphabet.
Alphabet’s long-standing foundation has been its Internet search engine, Google. Looking back several years, data from GlobalStats shows that Google controls between 91% and 93% of the Internet search share worldwide. With an 88 percentage point lead over its nearest competitor, Google has become a real monopoly and is therefore able to wield strong pricing power when serving ads. This competitive advantage (i.e. the cash cow operating segment) is not going any time soon anyway.
But what’s been really exciting is seeing Alphabet put its incredible cash flow from Google to work in other fast-growing areas. For example, YouTube has become the second most visited social media site on the planet, with 2.48 billion monthly active users. With so many eyeballs watching videos, YouTube has seen solid subscription growth and generates nearly $30 billion in annual ad revenue.
Alphabet’s investments in Google Cloud should also start paying off sooner rather than later. Although we are still in the very early stages of cloud services growth, Google Cloud has captured 8% of global cloud spending, according to a second quarter report from Canalys. Although a loss-making segment at the moment, the high margins associated with cloud services should play a role in helping Alphabet double its operating cash flow over the next four years.
In case those competitive advantages aren’t enough, consider that Alphabet is cheaper now than it ever was as a publicly traded company – a year-ahead price-earnings multiple of less than 18. Rarely can investors find such a high quality company with a reasonably low earnings multiple.
The third perfect stock for retirees that can turn an initial investment of $300,000 into $1 million by 2030 is payment processor Visa (V -1.06%).
Wall Street’s big concern right now with payment processors is how they’re going to perform with inflation hitting four-decade highs and US gross domestic product (GDP) falling in consecutive quarters. Because financial stocks like Visa are cyclical, they are prone to weakness during contractions and recessions.
However, the business cycle is a two-sided coin that largely favors optimists. Although recessions are inevitable, they tend to last no longer than two quarters. By comparison, virtually every economic expansion has been measured in years. A bet on Visa is simply a bet that US and global GDP, and therefore consumer and business spending, will grow over time (which is a virtual guarantee).
In addition to playing a numbers game to their advantage, retirees will also appreciate Visa’s leading role in the United States, the world’s largest consumer market. In 2020, Visa held a 54% share of credit card network purchase volume and was the only major payment processor to significantly increase its share of credit card network purchase volume after the Great Recession.
To add to the above, this is a company with many opportunities beyond the borders of the United States. Since most global transactions are still conducted in cash, Visa may choose to organically expand its payments infrastructure into underbanked regions of the world, or make acquisitions. to expand its presence, as it did with the acquisition of Visa Europe in 2016.
But the real secret to Visa’s success may well be the financial discipline of management. Visa acts strictly as a payment processor and does not lend. While he could very easily generate interest income and fees as a lender, this would expose him to potential loan losses during recessions and force him to set aside capital to cover said loan losses. . Since Visa does not lend, it is not required to take these protective measures and therefore rebounds much faster from recessions than other financial stocks.
Finally, keep in mind that while Visa’s 0.75% dividend yield isn’t very attractive on a nominal basis, the company has increased its quarterly payout by more than 1,300% since its payout. first quarterly dividend in 2008.