As an investor looking for retirement stocks, you should incorporate a different mindset than when you look at other investment opportunities. Assets that you pick for your retirement fund need to be chosen because they have a strong probability of generating significantly more cash flow at the time of your retirement so that they will be better positioned to pay you the dividends that you will hopefully be living off of.
This guiding principle can seem somewhat vague and open to interpretation. Because of this, I have outlined some principles for you to follow in choosing quality retirement stocks and eliminating risky ones from consideration. While these can by no means guarantee success, they will put the odds in your favor.
1. Consider demographics
American investors have a bias toward American stocks and American companies. These are companies that we often come into contact with on a regular basis, and we feel like we understand them. Unfortunately, America has lousy demographics from an investment standpoint. Americans are aging, and the American population is growing at a relatively slow pace. The former observation means that more Americans are reaching a point in their lives when they produce less and spend less money, and the latter fact means that in the future there will be a small increase in the number of producers and consumers in the United States.
With these points in mind, you need to look several years/decades out into the future. Which countries are going to have far more productive populations based on the fact that they have a low average age and based on the fact that they are growing their populations more rapidly? The answer is a handful of emerging market countries, but not all of them.
Therefore, I think an excellent strategy for investors looking for quality retirement stocks is to look for these countries — some of which include India, China, Indonesia, Turkey, and Brazil — and find companies that earn strong and steady cash flows from these populations. Telecommunication companies, utilities, consumer product companies, and even some retailers are ideal choices. Find those that have depressed share prices but which are still generating strong cash flow figures, and provided there aren’t any geopolitical or regulatory red flags, you have a large selection of excellent investments for the next couple of decades.
2. Avoid “story” stocks
We all know that there is a lot of money to be made in small drug companies that are trying to cure cancer or technology companies that are going to change the world through something like additive manufacturing. But companies such as Peregrine Pharmaceuticals (NASDAQ:PPHM) or 3D Systems (NYSE:DDD) are not good fits for your retirement portfolio. The value here comes from innovations that haven’t been made yet and that nobody understands. Therefore you may want to make these sorts of investments, but you have to keep them separate from your retirement portfolio.
3. Buy dividend growth, not dividend income
One of the most common mistakes people make in their retirement accounts is buying companies that are already paying large dividends. These may be quality companies, but they are also taking capital that they could be investing into their businesses and paying it out to shareholders. As a future retiree, you want to buy shares in companies that are growing their dividends. Some companies that pay small dividends but which are growing them rapidly include:
These companies all have growing businesses, and they are investing in their businesses rather than paying out huge dividends. At the same time, the fact that they pay dividends now shows a devotion to shareholders. You want to find companies that are like this because the dividends that they pay in 15-20 years on your current investment will be very large.
4. Look for long-term trends that are out of favor
This last point is not only a good guide for retirement investing – it is a good point for investing more generally. A good example of such a trend is growth in China. China has been rapidly growing for a long time now. Its population has been growing and becoming more affluent. However, recently this growth has slowed, and Chinese stocks have come down in price dramatically.
The long-term story, though, is still intact: 20 years from now, both the Chinese economy and population are going to be much bigger. However, don’t buy Chinese stocks when this is the consensus. Instead, buy when people seem to have forgotten this obvious fact. Buy stocks such as China Mobile (NYSE:CHL) or China Life Insurance Co. (NYSE:LFC), because in 20 years the Chinese are going to have substantially more phones and they are going to live lifestyles that mandate that they have life insurance.
This is just one example, but you can find others. Long-term trends are easy to spot, but they are difficult to invest in when they are out of favor. But if you do, you will be far more affluent in your golden years.
Disclosure: Ben Kramer-Miller is long CF Industries.