For years, the conventional knowledge has been that once you reach retirement, you should move your money mostly out of stocks and into bonds and more stable investments to ensure income and avert losses. Retirement isn't what it once was, though. We're living longer, more active lives in our golden years, and that means nest eggs need to have some growth component to prevent too much erosion of principal.
If you want the kind of growth appropriate for a retirement portfolio, then you should look at dividend stocks that will provide a growing income stream for years to come. With that in mind, we asked three Motley Fool investors to highlight a stock they see as a worthy candidate. Here's why they picked Royal Dutch Shell (RDS.A) (RDS.B), Ecolab (ECL -0.67%), and Canadian National Railway (CNI -0.67%).
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Planning for the future
John Bromels (Royal Dutch Shell): If you're looking for a stock in which you can feel safe investing your nest egg, check out Royal Dutch Shell. Its stellar dividend yield -- currently about 5.9% -- along with solid fundamentals and an eye toward the future offer retirees the perfect combination of security and income.
Shell is sitting in a sweet spot, thanks to the strict cost-cutting measures it implemented during the thick of the oil price downturn. With Brent crude prices above $60 a barrel for more than four months, those measures are now paying off in spades, turning the company's most recent fourth quarter into a bonanza, with net income up 136.6% year over year, to $3.8 billion.
But it's not just the short term that looks good for Shell. In 2017, it divested a number of underperforming assets, with a goal of dropping some $30 billion in assets by the end of 2018 to improve its margins even further. Meanwhile, it has expanded its liquefied natural gas business, a market it expects will grow even faster than oil in the coming years. That should help keep a nest egg safe even if the oil market softens five or ten years down the road.
Rising oil prices, an incredible current dividend yield, and solid fundamentals make Royal Dutch Shell an excellent choice for retirees' portfolios.
Slow and steady wins the race
Brian Feroldi (Ecolab): Retirees looking to grow their portfolio should favor companies that offer products and services that are in demand during all economic cycles. If that company promises strong profit growth potential and pays out a rock-solid dividend payment, all the better. Finding all of these traits in a single business is tough, but I think that Ecolab meets this criteria with ease.
Ecolab is a leading provider of cleaning and sanitation solutions around the world. The company sells its products and services to a wide range of industries that include restaurants, farms, healthcare facilities, energy companies, miners, pharmaceutical markers, and more.
What's great about Ecolab's business is that its cleaning and sanitation services are not an optional expense for most companies. Keeping a clean facility is not only a must for ensuring that employees and customers are healthy but in many cases it is also a regulatory requirement. That fact allowed Ecolab's top and bottom lines to remain healthy even throughout the recent financial crisis.
But how will Ecolab be able to post net income growth from here? The company's plan is to expand geographically, buy back stock, make tuck-in acquisitions, and steadily improve margins. When combined with a lower tax rate and steady recovery in its energy business, double-digit profit growth isn't out of the question. If true, then the company's 32-year streak of passing along dividend bumps to investors should continue.
Ecolab's business might be a boring stock to follow, but this steady-eddy company should be able to reward patient shareholders with market-beating returns and consistent dividend raises over time. That's a combination that should appeal to nearly every retiree.
A couple hiccups have this stock trading at a major discount
Tyler Crowe (Canadian National Railway): When it comes to stable businesses that churn out cash on a regular basis, railroads are high on the list. It's extremely difficult for a new company to come in and build out the infrastructure necessary to make a competitive offering in this industry, so existing companies are well protected from additional competition. Also, the low cost of moving goods on rail compared to other transportation methods means it will likely stick around for years to come and carry on being wealth-generating enterprises.
For years, Canadian National Railway has been the gold standard in North American rail companies. It has the only rail network in the country with direct connections to the Atlantic, Pacific, and U.S. Gulf Coasts, which gives customers more extensive shipping offers. Also, it just so happens that Canadian National has been one of the lowest-cost operators out there with the best operating ratio in the business.
This past quarter, the company took a bit of an operations hit. Winter weather and booming demand from the energy sector for frack sand and crude via rail meant the company was somewhat capacity constrained. As a result, shares have moved down in recent quarters to a point where Canadian National's valuation is in line with its less efficient peers.
CNI EV to EBITDA (TTM) data by YCharts.
When you can buy the best in any industry when it is priced like the rest, then you should certainly take a look. At this juncture, Canadian National Railway is in that situation, making it an enticing time for retirees to look at this stock.
