How to Identify the Best Retirement Stocks
Saving for retirement is a topic that many retirees find interesting at the wrong time. Last year, a report released by Schwartz Center for Economic Policy Analysis revealed that up to 68% of Americans are not saving in an employer-sponsored plan.
During the same year, a report by Employee Benefit Research Institute revealed that nearly 40% of employees have less than $10,000 in their 401k savings accounts while the median amount was estimated at about $18,433.
This means that a majority of people do not have enough money in their savings accounts to cater for their health needs when they retire from gainful employment. Interestingly, older workers tend to save more. The median for savers aged between 55 years and 64 years at Vanguard was estimated to be about $76,381, in 2013.
This illustrates that most Americans begin to think about saving when they are approaching retirement. The 401k savings figures also raise other questions including alternatives that a majority of the younger generation could be putting their money to augment what’s in their federal savings accounts.
Some of the most common ways of saving for retirement outside the traditional alternatives is through the stock market, fixed income or real estate. With a fixed income investment in a government issued a security, you will be receiving recurring income in the form of interest and finally your principal investment at the end of the maturity period.
The same case applies to investments in real estate, whereby you receive recurring rental income while still retaining the ability to sell your asset at some point in the future.
Now, in order to identify the best retirement stocks in the stock market, the company must have similar characteristics. That is, it must be able to provide you with a steady income and still provide some capital gains when you decide to sell the stock.
So what are the things to look out for when sifting the market for the best retirement stocks?
One of the key metrics of a good stock that is likely to deliver steady income for several years is financial stability. This means that the company’s balance sheet is not staggered with long-term debt and the ability to generate free cash flow is unquestioned. As such, it is good to look at the company’s debt to equity ratio as well as the current ratio.
This is another important aspect when it comes to identifying stocks for long-term gains. Stable management that has been delivering good results for several years is likely to provide sustainable success for several years to come. As such, it is good to check out how often the company has changed top management and how those changes have affected the stock in the market. A good comparison, in this case, would be Yahoo! versus Apple.
When looking for a retirement stock, dividends should be at the top of your checklist. This is because they are the ones that are supposed to fill the role of a recurring income generator. Like the interest paid by an investment in government securities or rental income for real estate investments. In order to identify a good dividend stock for retirement, investors need to look at dividend history, yield, payout, and growth.
They would want to know how many times the company has paid dividends and how consistent the payment has been. In addition, investors saving for retirement would want to know how the company has managed to grow dividend over time, as well as, the current payout ratio. The lower the payout ratio compared to the prevailing dividend yield, the better for the investor. This means that the company will have a lot of room to increase its dividend over time. It is not recommended to go for stocks with a payout of more than 70%.
Furthermore, investors should look at the company’s interest coverage ratio. This ratio determines the company’s ability to continue generating operating cash flows, which are then used to pay dividends to shareholders. The high the ratio, the better the stock is for dividend investors. Generally, a good dividend stock is viewed as the one that has a dividend yield of at least 3%, but the recommendable rate is 5% with a similar or better growth rate.
Industry of operation
It is important that the retirement stock you choose operates in an industry that is less sensitive to a recession and other perils associated with the ability to continue generating revenue. For instance, companies that sell basic consumer products and services are likely to be less sensitive to financial crises because regardless of the conditions, people must spend to keep such services running, such as energy (electricity for example), or health.
The bottom line is that the younger generation appears to be hell-bent on relying on alternative means of saving for retirement as they continue to seek higher returns from their invested monies. The stock market is certainly one of the best when it comes to alternatives, but the risks inherent in the market cannot be overlooked. As such, it is important to consider carefully, certain requirements that you would want a retirement stock to meet. This article outlines a good drawdown to start from.