It’s been a year to remember, but in all the wrong ways. the S&P 500, often considered the best barometer of stock market health, delivered its worst first-half performance since Richard Nixon was president. To begin with, the technology dependent Nasdaq Compositewhich has been largely responsible for pushing the market to new highs over the past year, has plunged firmly into a bear market.
While periods of heightened volatility and uncertainty are unnerving for all types of investors, it can be an especially difficult time for retirees. People who have hung up their work coats forever may not have the ability to deal with significant reductions in their principal investment.
But there is a silver lining in the midst of this turmoil for retirees. Bear markets have a rich history of rolling out the red carpet for patient investors, both young and old. Every double-digit percentage decline in the major US indices throughout history has ultimately been wiped out by a bull market rally. In other words, every bear market is a bona fide buying opportunity.
Best of all, retirees don’t have to chase highly volatile growth stocks to generate meaningful returns. A number of rock-solid companies with reasonably low volatility are ready to be picked up by older investors right now. What follows are three stocks perfect for retirees that can turn $300,000 into $1 million by 2030.
Enterprise Product Partners
The ideal first stock for retirees to buy that has the potential to generate at least a 233% total return, including dividends paid, by 2030 is the energy stock. Enterprise Product Partners (EPD -1.71%).
It is true that the idea of investing in an oil stock may not seem pleasant 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 to plunge (very briefly) to negative $40 a barrel. Such historic volatility is probably still fresh in the minds of retired investors.
However, Enterprise Products Partners is a different beast entirely and was largely unaffected (operationally) by the pandemic. That’s because it’s a midstream energy company. Midstream providers are effectively energy brokers who help get crude oil and natural gas from drilling fields to storage tanks or processing plants. In the case of Enterprise Product Partners, it owns more than 50,000 miles of transmission pipelines, 14 billion cubic feet of natural gas storage space, 19 deepwater piers, and 24 natural gas processing facilities.
The beauty of midstream energy companies is that virtually all of them use fixed-rate or volume-based contracts. Structuring contracts in this way eliminates the volatility associated with swings in oil and natural gas prices and makes Enterprise Products’ operating cash flow highly predictable. This predictability of cash flow is important, as it allows the company to disburse capital for infrastructure projects and acquisitions without negatively affecting its quarterly distribution (ie, dividends) or profitability.
Additionally, Enterprise Products Partners’ Distribution Coverage Ratio (DCR) never dipped 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 out to shareholders. A figure equal to or less than 1 would indicate an unsustainable payment.
The icing on the cake? The company has increased its base annual distribution in each of the last 24 years and is currently looking at a fully sustainable return of 7.1%.
A perfect second stock for retirees to buy that can turn an initial investment of $300,000 into $1 million over eight years is the FAANG stock. Alphabet (GOOGLE -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 are not necessary to grow their savings. While dividend stocks are typically mature, time-tested companies with generally low volatility, retirees can get low volatility and considerably juicier growth prospects from a company like Alphabet.
Alphabet’s foundation has long been its Internet search engine, Google. Looking back several years, GlobalStats data shows that Google has controlled between 91% and 93% of Internet search share worldwide. With an 88 percentage point lead over its next closest competitor, Google has become a true monopoly and thus commands strong pricing power when placing ads. This competitive advantage (ie the operating segment of the revenue source) will not go away any time soon.
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 networking site on the planet, with 2.48 billion monthly active users. With so many eyes watching videos, YouTube has delivered solid subscription growth and is generating nearly $30 billion in annual ad run rate revenue.
Alphabet’s investments in Google Cloud should also start paying dividends sooner rather than later. Although we are still in the early stages of the growth of cloud services, Google Cloud has absorbed 8% of global cloud spending, according to a second quarter report from Canalys. While this is a money-losing 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 these competitive advantages aren’t enough, consider that Alphabet is cheaper now than ever as a publicly traded company: a forward price-earnings multiple of less than 18. It’s rare that investors can find such a company. high quality 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 the payment processor Visa (V -1.06%).
The big concern Wall Street has right now with payment processors is how they will fare with inflation reaching four-decade highs and US gross domestic product (GDP) declining in consecutive quarters. Because financial stocks like Visa are cyclical, they are prone to weakness during downturns and recessions.
However, the business cycle is a two-sided coin that greatly favors the optimist. Although recessions are inevitable, they tend to last no more than a couple of quarters. By comparison, virtually all economic expansions have been measured in years. A bet on Visa is simply a bet that US and global GDP, and thus consumer and business spending, will rise over time (which is a virtual guarantee).
Beyond simply playing a numbers game to their advantage, retirees will also appreciate Visa’s leadership role in the US, the world’s largest consumer market. As of 2020, Visa held a 54% share of credit card network purchase volume and was the only major payment processor to significantly expand its share of credit card network purchase volume after of the Great Recession.
To add to the above, this is a company with many opportunities beyond US borders. Since the majority of global transactions are still done with cash, Visa may choose to organically expand its payment infrastructure in regions in the world with few banks or make acquisitions. to expand its presence, as it did with the purchase of Visa Europe in 2016.
But the real secret ingredient to Visa’s success may be management’s financial discipline. Visa acts strictly as a payment processor and does not lend. Although you could very easily generate interest and fee income as a lender, doing so would expose you to potential credit losses during recessions and would require capital to be set aside to cover such credit losses. Since Visa doesn’t lend, you don’t need to take these protective measures and therefore recover from recessions much faster than other financial stocks.
Finally, note that while Visa’s 0.75% dividend yield isn’t much to consider in nominal terms, the company has increased its quarterly payout by more than 1,300% since it distributed its first quarterly dividend in 2008.