No matter how old you are, stocks are an important part of a properly allocated investment portfolio. The difference as you get older is that your stock allocation should gradually decline, and the type of stocks that belong in your portfolio change.
Specifically, instead of long-term growth, senior investors' priorities shift toward capital preservation and reliable income. Here are two great examples of stocks that can work nicely for investors of all ages but could be especially smart additions for seniors.
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What makes a great stock for seniors?
There are a few qualities that make good stocks for senior citizens.
Since capital preservation is a big priority for seniors, it's important to invest in companies with relatively low risk. That is, stocks that operate in businesses that are always needed, have attractive fundamentals, and have competitive advantages within their specific industry.
It's also nice to have low volatility, meaning stocks that fluctuate relatively little relative to the rest of the market. We can gauge volatility by looking at a stock's beta. You'll notice I included a "beta" column in the chart below this section, and in a nutshell, beta tells you how reactive a stock is to market movements. A beta of less than one means a stock tends to react less than the average S&P 500 stock, while a beta of more than one indicates a more volatile stock. You'll notice that both of the stocks discussed have betas of significantly less than one.
Income is often a priority as well, so above-average dividends are ideal for seniors' portfolios. However, while high dividends are nice, great stocks for senior citizens offer dividends that are sustainable and have a high probability of growing over time.
Finally, although it's not the top priority, it's nice to have significant long-term growth potential. Growing dividends combined with a growing stock price can help your portfolio keep up with (or beat) inflation over time -- a big concern for retirees.
Two great dividend stocks for senior citizens
Recent Stock Price
Public Storage (NYSE: PSA)
Realty Income (NYSE: O)
Data source: TD Ameritrade. Prices, yields, and beta information as of 5/22/18.
A dominant leader in an attractive business
In the self-storage industry, there's Public Storage, and then there's everyone else. Public Storage is such a dominant industry leader that it's larger than its next three competitors combined.
Here's how Public Storage checks all of the boxes for senior citizens.
First, it's a low-risk company in an attractive business. With low maintenance and operational expenses, self-storage facilities don't need high occupancy rates to make money, and this is especially true for Public Storage and its ultra-strong balance sheet. In fact, the company has said that it could break even with just 30% of its storage space occupied. It currently runs an occupancy rate of about 94%, so there's little reason to worry about the company's continued profitability, even if the economy takes a turn for the worse.
With a beta of just 0.3, you can expect Public Storage to be far less volatile than the overall market.
Public Storage is an excellent income stock. It yields 3.9% based on its current share price, and the company has done an excellent job of increasing the payout, especially over the past decade or so. In fact, since 2009, Public Storage's dividend has grown by more than 260%.
Finally, with such a dominant presence, it may seem that Public Storage has little room for growth. This is incorrect for two main reasons. First, the self-storage industry is highly fragmented, and there's lots of room for consolidation. With its strong credit and financial flexibility, as well as a desirable brand name, Public Storage has clear advantages over peers. And second, Public Storage has recently started to venture into ground-up development, which opens up an entirely new avenue of value-creation.
The best overall dividend stock in the market?
Realty Income is a net-lease REIT, specializing in freestanding, single-tenant retail properties. I've referred to Realty Income several times as "the best overall dividend stock in the market," so let's run through our "senior stock" checklist to see why.
As far as a low-risk business is concerned, Realty Income's lease structure and tenant composition are designed for worry-free, growing income. If you're not familiar, a "net lease" is a type of property lease agreement under which the tenant is responsible for property taxes, building insurance, and most maintenance expenses, taking the variable costs of property ownership away from the landlord. What's more, net leases generally have long (more than 15-year) initial terms, with annual rent increases, or escalators, built in. All Realty Income has to do is put a tenant in place and enjoy more than a decade of predictable, growing income.
Speaking of tenants, nearly all of Realty Income's retail tenants operate in recession- and e-commerce-resistant areas of retail. Think service-based businesses like fitness centers, non-discretionary retailers like drug stores and convenience stores, and discount-oriented retailers like warehouse clubs.
This low-risk, predictable business model is a big reason Realty Income is one of the least volatile REITs in the market.
On to the dividend. It's tough to find a stock with a better dividend track record. Realty Income pays a 5% dividend yield in monthly installments, which is excellent for seniors who rely on their investments for income. The company has made 575 consecutive monthly dividend payments and has increased its payout 96 times since its 1994 NYSE listing.
Finally, Realty Income has an excellent track record of growth through acquisition. Its strong credit rating allows it access to low-cost capital, and by acquiring pre-existing properties, Realty Income has tenants in place before it ever spends its money. In fact, it is Realty Income's combination of smart growth and consistent income that has allowed the company to generate 15.7% annualized total returns over the past 24 years.
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