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The 7 Best Stocks to Buy for an Income-Rich Retirement

Will Ashworth, InvestorPlace.com

InvestorPlace - Stock Market News, Stock Advice & Trading Tips


Portfolio manager Ned Davis studied the returns of S&P 500 stocks from 1972 to 2004. His goal? To figure out what the best stocks to buy were over this 33-year period.

Davis concluded that if you bought dividend stocks whose companies grew the dividends paid to shareholders over the 33 years, you'd have achieved an annual return of 10.6%, 3.3% better than dividend-paying stocks that didn't increase their yields over the same period.

More importantly, Davis's study revealed that dividend growers outperformed non-income-paying stocks by 630 basis points. The moral of the story? If you want to have an income-rich retirement, you've got to have a diversified basket of dividend stocks that will deliver both capital appreciation and income growth.

For the purposes of this article, we're going to recommend the seven best stocks to buy to meet or exceed the returns from the S&P 500 to help you do that.

Prices and data are from the original InvestorPlace story published on March 29, 2017. Click on ticker-symbol links in each slide for current prices and more.

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Clorox Co. is easily one of my favorite stocks of all time. The maker of well-known brands such as Glad garbage bags, Kingsford charcoal, Brita water filters, Burt's Bees skin care, Pine-Sol cleaning products, and much more, has increased its dividend for 25 consecutive years qualifying it as a Dividend Aristocrat.

Currently yielding 2.3%, Clorox's five-year dividend growth rate is 7.1%; over the same period its earnings per share grew 14.3%, a key reason CLX stock has achieved a five-year total return of 9.6% through March 28, 2.29% better than the S&P 500.

You could not find a more consistent stock if you tried. Up 14.8% year to date, Clorox is working on a ninth year of positive returns out of the last 11; in 2008, Clorox had a total return of -12.1%, significantly better than the S&P 500 at -37%.

Remember, its dividend and earnings growth that will get you that income-rich retirement and Clorox should be at the top of your list.

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On March 23, Sherwin-Williams Co. announced that it was delaying the closing of its $11.3 all-cash deal to buy The Valspar Corp. (VAL), one its major competitors, by three months to June 21, so that it could gain the Federal Trade Commission's approval.

The deal gives Cleveland-based Sherwin-Williams a much greater market position within the Asia-Pacific and EMEA regions of the world, not to mention $280 million in annual savings by 2018. Excluding one-time costs, it will be immediately accretive to earnings and will vault it ahead of PPG Industries, Inc. (PPG) into the number one global paints and coatings business.

What might be considered a transformational deal, SHW shareholders can expect good things to come from it.

Currently yielding 1.1%, it too is a Dividend Aristocrat. Sherwin-Williams' five-year dividend growth rate is 18.3% with a five-year earnings per share growth rate of 23.4%. Up 15.5% year-to-date through March 27, SHW has achieved a five-year total annualized return of 24%, almost double the S&P 500.

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Extra Space Storage

Americans have too much stuff, hence the need for self-storage companies like Extra Space Storage, Inc., which was moved into its own real estate sector in September, part of the 11th and newest sector of the S&P 500.

Extra Space Storage operates 1,427 self-storage locations in 38 states, Washington D.C. and Puerto Rico. In 2016, it generated adjusted funds from operations of $3.85, 23% higher than a year earlier. Of the 1,427 self-storage locations, 59% are wholly-owned, 12% are joint ventures and 29% are managed for third-party owners. Its two biggest markets are the Northwest and California, which account for 16% and 19%, respectively.

In 2011, EXR paid 56 cents in dividends; in 2016, it paid out $2.93 per share for a five-year growth rate of 39.2%. Currently yielding 4.2%, EXR is one stock whose business isn't going out of style anytime soon. As for the stock itself, it's achieved a 10-year cumulative total return of 519.0%, more than double its storage industry, peers.

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Goldman Sachs

A recent ad placed by Goldman Sachs Group Inc. suggests that the investment bank is looking to capture the mass affluent market by creating its own robo advisor, a big departure from the uber-wealthy clients it tends to advise, and a deeper push into consumer-focused businesses.

These moves are part of the bank's bigger desire to grow its investment management business, which as of the end of 2016 managed or administered $1.4 trillion in assets. With many of its competitors starting robo advisors, Goldman Sachs had little choice but to do the same.

As a company, GS has done a reasonably good job trimming the fat over the past five years -- revenues were 6.2% higher while expenses were 10.3% lower -- providing greater operating leverage and stronger profitability. Over the past five years, Goldman Sachs' earnings per share and dividends per share grew 18.9% and 13.0%, respectively, a sign that dividends will keep growing in the years to come.

Long term, you'll want a financial stock in your portfolio like Goldman Sachs.

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CVS Health Corp

Despite the American Healthcare Act's ultimate demise, the healthcare industry remains a great place to invest for your retirement, but rather than recommend a drug manufacturer, I'm going with CVS Health Corp., a company with its fingers in many pies.

CVS is no longer a drug store retailer, but a health and wellness company, a reality that assures CVS stock a higher multiple in the years ahead. It's a pharmacy, walk-in healthcare clinic, pharmacy benefits manager and provider of long-term care pharmacy consulting services all wrapped up into one gigantic business generating between $7-$8 billion in free cash flow annually ensuring it continues to grow dividends.

Since 2011, CVS has grown earnings by 13.8% annually to $4.90 per share and dividends by 27.9% per year to $1.70, a payout ratio of 34.9%. In that five-year period, CVS stock's achieved an annual total return of 13.3%, about the same return as the S&P 500.

Currently yielding 2.5%, CVS's ability to lower costs for its healthcare stakeholders will continue to benefit shareholders for years to come.

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It wasn't too long ago that investors were calling for Tim Cook's head on a platter. Oh, how the times have changed. Apple Inc. stock is up 35.5% over the past 52 weeks through March 28 and is now the largest publicly traded company in the world -- at least until Saudi Aramco goes public -- with a market cap of $770 billion.

Investors worried about Apple's slowing growth shouldn't be. It's got lots of things on the horizon that will continue to drive the Cupertino company's stock higher. Recently, I discussed how its services revenue -- which includes iTunes, AppStore and Apple Music -- was becoming a bigger part of the company's overall profitability thanks to operating margins approaching 50%.

Sure, Apple still revolves around its iPhone franchise, but services are increasingly becoming the cherry on top of the treat that will drive AAPL stock to $200 sooner rather than later. For investors looking for an income-rich retirement, Apple's huge free cash flow -- $52.5 billion as of Q1 2017 -- means dividend payments will continue to grow in the years ahead.

Currently yielding 1.6% on a 25% payout, look for Apple to double its payout ratio pushing the yield to 3%-plus. With earnings growth still reasonably healthy and share repurchases a big part of its capital allocation strategy, AAPL stock could present the best combination of capital appreciation and income potential of all seven of these stocks going forward.

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Anyone who follows retail stocks knows what a bloodbath it's been for companies stuck in the middle between luxury goods and discount merchandise. Consumers want experiences, not more stuff.

That's why I'm including Walt Disney Co. in my list of seven stocks to buy for an income-rich retirement. Sure, it sells "stuff" through its Disney stores, but for the most part, it's a company about experiences: movies (I saw Beauty and the Beast this past weekend and it was actually good to my surprise), cruises, theme parks, sports (who can forget ESPN) and resorts.

InvestorPlace contributor Dana Blankenhorn, himself a Disney shareholder, recently fretted about Disney's inability to meet its problem issues such as ESPN head-on, leaving DIS stock to languish as a result. As Blankenhorn points out, investors are happy that CEO Bob Iger will stay on past his retirement. And they should be. Since he took the helm of Disney in October 2005, DIS stock's generated an annual total return of 14.5%, 8.7% better than the SPDR S&P 500 ETF (SPY).

Iger is known for making good acquisitions; I believe he will make one more big one before hanging up his CEO gloves. Currently yielding 1.4% with a payout ratio of 26.9% and free cash flow that's higher than it's ever been, investors can rest assured their returns will continue to be better than the market as a whole.

This article is from Will Ashworth of InvestorPlace. As of this writing, he held none of the aforementioned stocks.

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