When you're investing during retirement or in anticipation of it, you tend to need a certain kind of stock. Growth potential is certainly nice to have, but things like income and consistency become far more important. With that in mind, here's why three of our Motley Fool contributors think Realty Income (NYSE: O), PepsiCo (NASDAQ: PEP), and Microsoft (NASDAQ: MSFT) are perfect stocks for retirement.
Steady dividends and growth
Matt Frankel, CFP (Realty Income): One of my favorite retirement stocks, and one of the largest holdings in my own stock portfolio, is Realty Income Corporation. Realty Income is a real estate investment trust, or REIT, that specializes in freestanding, single-tenant retail properties.
There are two main characteristics that make Realty Income a great stock for retirement.
Image source: Getty Images.
First, Realty Income focuses on properties occupied by businesses that work well in any economy, and that should be fine no matter how large e-commerce gets. Most of the portfolio is occupied by nondiscretionary retail businesses like convenience stores, service-based businesses like fitness centers, and discount retailers like dollar stores. Very few of the company's properties have become vacant due to recessions or e-commerce headwinds.
Second, Realty Income's properties are leased on a triple-net basis, which means the tenants are responsible for property taxes, insurance, and maintenance, essentially shifting the variable expenses of ownership to them. And triple-net leases are typically signed for long initial terms (15 years or more) with annual rent increases built right in.
In short, Realty Income is designed to produce consistent, growing income, year after year, and that's what it's done. The REIT has paid 585 consecutive monthly dividends, and has increased the payout rate 86 times since its 1994 NYSE listing. What's more, thanks to smart acquisition/disposition strategies and appreciation of the properties owned, Realty Income has generated a staggering 16.9% annualized return for those 25 years.
Dependable dividends and a sturdy business
Keith Noonan (PepsiCo): PepsiCo has long been a go-to stock for retirement portfolios, and the characteristics that have made it a favorite steady-growth, income-generating investment remain intact. While performance has been hindered by a recent slowdown for soda sales in the domestic market, PepsiCo has been making moves to update its beverage lineup to better suit shifting market tastes, buying up a range of healthier drinks and acquiring sparkling water and drink company SodaStream.
The company's domestic beverages segment accounted for roughly 39% of sales last year, and will likely continue to face some pressures, but the global outlook for soda remains sweeter. The company is also diversified outside of the beverages space, with its Frito and Quaker brands each being substantial sales contributors. So while the domestic soda slowdown is something PepsiCo will have to work against, it has other product categories and geographic segments that should help the business continue to deliver organic growth and keep cash flowing back to shareholders.
The company has a fantastic payout history, with a 46-year streak of annual dividend growth. PepsiCo also more than doubled its payout over the last decade. Shares yield roughly 3% and trade at roughly 22 times the year's expected earnings, presenting a great business and a great dividend profile at a reasonable price.
This tech giant can go the distance
Chris Neiger (Microsoft): Sure, there are plenty of stocks that pay higher dividends than Microsoft's 1.6% yield. But it's crucial for retirees to look beyond that percentage to a company's underlying business -- and long-term growth prospects -- to determine whether a company truly makes a good dividend stock. And when it comes to these, Microsoft looks as strong as ever.
Consider that the company's sales increased 16% in the most recent quarter to $30.6 billion, and earnings per share reached $1.14, both ahead of analysts' consensus estimates. Shares are up 150% over the past three years, thanks in part to investor optimism around the company's current business and its ability to transition into new growth areas.
In the third quarter of 2019, Microsoft's sales from its More Personal cloud computing segment increased 8% year over, productivity and business processes revenue was up 14%, and intelligent cloud sales jumped 22%. Additionally, revenue from the company's important Azure cloud computing platform popped 73%.
And there's reason to believe that Microsoft has more room to increase its sales as well. The public cloud computing market will be worth $278 billion three years from now, and Microsoft is already the second-largest player with 16.5% of the market.
Finally, Microsoft looks like a good bet for retirees because the company has consistently returned money to its shareholders as it has grown its business. The company returned a total of $7.4 billion to shareholders in the form of dividends and share repurchases in the third quarter. For investors looking for a company that can go the distance with its dividend while still benefiting from new growth trends, look no further than Microsoft
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Neiger has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Realty Income. The Motley Fool owns shares of and recommends Microsoft. The Motley Fool has a disclosure policy.