For some baby boomers, these next few years are either the last hurdle before retirement or they are already in retirement and starting to use investment income to supplement their existing income. In both instances, people at this point in their investing lives will start to look less at those high-risk/high-reward stocks and more at more established businesses that will throw off additional income in the form of dividends.
With this in mind, we asked three of our investing contributors to each highlight a stock they see as a great stock to help the baby boomer age group in that phase of their investing careers. Here's why they picked General Motors (GM), Nucor (NUE), and Omega Healthcare Investors (OHI).
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Value in an expensive market
Tim Green (General Motors): There's a lot of uncertainty when it comes to the automotive industry. Over the coming decades, electric cars, self-driving cars, and ridesharing services could have profound effects on the U.S. and global automotive markets. In the short term, an apparent peak in U.S. auto sales raises the prospect that automakers will see slumping revenue and profits in the coming years.
With all this uncertainty, buying shares of General Motors may seem risky. Every stock carries some risk, but I would argue that GM's beaten-down valuation and its post-financial crisis focus on profitability make the stock a solid buy. And GM isn't sitting still as the industry changes. The all-electric Chevy Bolt is slowly picking up sales momentum, and GM is using its Maven ridesharing service to dip its toes into a market that could end up being a big part of the company's future.
While GM is making these investments, it's also producing record profits. The company expects to generate as much as $6.50 in adjusted earnings per share this year, putting the stock price at less than six times that number. Earnings may decline if there's a downturn in U.S. auto sales, but that valuation looks overly pessimistic to me. Add in a 4% dividend, which only eats up about 25% of GM's adjusted earnings guidance, and you have a value and dividend stock that's hard to pass up.
A steady dividend-paying steel stock
Tyler Crowe (Nucor): Investing in industrial manufacturers like steel company Nucor means investors have to pay attention to valuation. Buying a stock at high valuations or at the wrong time in the industry cycle can lead to low rates of return or worse. Looking at Nucor's most recent results and the company's current valuation, though, this seems to be one of the better times to invest in this Dividend Aristocrat.
Steel manufacturing is a notoriously cyclical industry that has been oversupplied for years. The commodity boom that fed China's seemingly insatiable appetite led to way too much production capacity by 2010-2011 and contentious trade issues led to incredibly difficult times for the industry. Throughout that time, Nucor was able to keep its head above water thanks to several aspects that make the company unique in this industry: low-cost manufacturing that use electric arc furnaces, investments in higher-margin products, and a workforce compensation program that makes costs responsive to the market. This allowed the company to remain profitable throughout this downturn and even strengthen its business by acquiring smaller businesses.
Investors should expect to pay a premium for a management team that can navigate a downturn and continues to raise its dividend during tough times, but shares of Nucor today look rather reasonable at 15 times earnings -- on the lower end of its 10-year average -- and a dividend yield of 2.8%. For anyone looking to supplement their income with a reliable dividend that is likely to grow for some time, Nucor is a stock to look at deeper.
A big dividend to bolster your income stream
Cory Renauer (Omega Healthcare Investors Inc.): Real estate investment trusts (REITs) are one of the best ways to generate a steady stream of dividend income to last throughout your retirement years. This particular one is well positioned to benefit from rising demand baby boomers will create for the skilled nursing and long-term care facilities it owns across the country.
Collecting rent from tenants that operate a portfolio of 986 facilities recently allowed Omega Health Investors to increase its dividend for the 20th consecutive quarter. The latest payout works out to a huge annualized 7.9% yield at recent prices due to issues concerning a handful of operators that I feel are overblown. During the latest quarterly earnings conference call, management revealed that a few of the 77 third-party facility operators it collects rent from have fallen behind on their rent, and a few have responded to information requests from the Department of Justice.
It's important to remember, Omega Healthcare's operators don't need to thrive, they just need to keep their heads far enough above water to pay the rent. Demand for skilled nursing and long-term facilities is growing steadily enough that even if a few top operators perish, others will be waiting in line to take their place.
This year, Omega Healthcare expects adjusted funds from operations to fall in line with last year at $3.42 per share, or up to $3.44 per share. A year of dividend payments at their current level will eat into around 75% of expected FFO this year. That's higher than I'd like to see from a company that raises its payout each quarter, and could make it hard to continue its streak unless the bottom line begins to grow again. With steadily rising demand for this REIT's facilities, though, that shouldn't be a problem.
