These 3 Stocks Should Be in Every Retirement Portfolio

The last thing you want to do when you’re retired is sit around and worry about your portfolio. After all, you’ve worked hard and want to spend your senior years enjoying life, free from financial cares.

The best way to do that is to have a portfolio that delivers returns in all markets and helps you sleep well at night. Below, three Motley Fool contributors suggest three stocks for your retirement portfolio that can help make that goal come true.

Consider this truly rock-solid business

Chuck Saletta: A challenge that retirees face is that they no longer have earned income to use for cash to replace shares of companies they own that get into trouble. That argues for investing in truly “rock-solid” companies. There’s one particular insurance company that’s so obsessed with having a rock-solid financial footing that it uses an actual rock as its corporate logo. That company is Prudential Financial (NYSE:PRU), and the rock is the Rock of Gibraltar.

Like all insurance companies, Prudential Financial is in the business of pricing and selling protection against financial risks. It’s an interesting business line, as when they price their products correctly, they can earn a positive return on the premiums they charge for accepting that risk. When their risks exceed those premiums, however, insurers like Prudential rely on their balance sheets to cover the gap.

Where Prudential Financial gets its rock-solid image from is the way it manages that balance sheet. The company owns over $400 billion in bonds as assets and has over $67 billion in net equity. In insurance terms, that means a lot can go wrong, above and beyond what it has already accounted for in its pricing, and the company can still wind up just fine.

Despite that strength, investors can buy shares of the company for about 0.6 times its book value and around eight times its anticipated earnings. This is, in part, because the company’s expected to grow at a mere 6% rate over the next five or so years. 

The upside of that relatively cheap price is that investors are able to get a dividend yield of around 4.8%, with that dividend easily covered by the company’s expected operating cash flows. That profile may be ignored by investors looking to own the next big thing, but it’s a great fit for a retiree looking to get the benefits from owning a very solid business.

A fast-food stock that’s good for your portfolio’s health

Eric Volkman: The best retirement stocks are companies that have proven, through boom times and busts, around fads, trends, and movements, that they can grow their business. Although some might not necessarily tag it as an ideal retirement stock, I think McDonald’s (NYSE:MCD) is perfect for such a portfolio. 

Several years ago, when the healthy eating trend started to rise around the world, many observers thought the company was done for. As the standard bearer for fast food, a notoriously unhealthy category, it was a dinosaur that would soon be vaporized by the meteor of progress.

But McDonald’s adapted instead of digging in its powerful heels and pretending the world wasn’t in the midst of change. It introduced (relatively) healthy menu options, and made a concentrated effort to demonstrate it was concerned about the well-being of its customers. At one point, it even included fitness trackers in Happy Meals — hardly a menu item anyone associates with exercise and activity.

As it was going the route of kale burgers and Southwest grilled chicken salads, McDonald’s was also enhancing the one aspect of its business that made it a top fast-food option in the first place: convenience. Always good at harnessing technology, Mickey D’s has invested heavily in automated solutions on both the public restaurant side and behind the scenes in the kitchen.

Ordering kiosks, with their intuitive user interfaces anchored by large, bright graphics, are now common in its restaurants. And specialized robots perform tasks that help the staff cook the food. The McDonald’s smartphone app is reliably smart, quick, and easy to use. Investments in such technology can be pricey at the beginning, but pay off handsomely in cost savings down the road.

Meanwhile, the company consistently crushes profitability. Even in 2020 — an awful year of losses for restaurants, generally, due to coronavirus pandemic shutdowns — McDonald’s managed to deliver its usual 20%-plus net profit margin, specifically 24.6%. That’s well above the typical rate for the cost-heavy food service industry, and even for some of the more profitable sectors of the economy.

To cap this all off, McDonald’s is a tasty stock for retirees due to its reliable quarterly dividend. The company is a Dividend Aristocrat, meaning it’s an S&P 500 index stock that has constantly lifted its payout at least once for a minimum of 25 years running (its streak stands at a dizzying 44, nearly half a century!). And the dividend yield is generous, compared to that of many blue chip stocks, at 2.3%.

Because McDonald’s is not and never will be the top healthy-eating destination in the neighborhood, retirement savers shouldn’t dine at their local McDonald’s every day. But they should absolutely consider permanently adding some of the company’s stock to their holdings.

Don’t forget about growth!

Barbara Eisner Bayer: Once you stop earning income and are living off a combination of Social Security and your savings, you may think that having a portfolio full of bonds and CDs is the best way to go. But that would be shortsighted because inflation will reduce the purchasing capacity of your hard-earned savings. Therefore, in order to keep up with inflation, it’s important to commit at least a small percentage of your retirement portfolio to growth. But which growth opportunity should you choose?

Finding good growth stocks takes time, as they need to be monitored every quarter to make sure they remain in line with your investing philosophy. While some people love managing their portfolios, even when they’re retired, many others — and I’m going to go out on a limb and suggest it’s a majority of retirees — would prefer things be on autopilot so they can get up in the morning and do whatever they want. Therefore, it makes sense to choose investments that will take care of themselves while you’re off visiting the grandkids, hobbling around the tennis court, or reading the newspaper while enjoying a fine cup of brew.

Therefore, the best growth stock for your retirement portfolio may not be a stock at all, but rather a basket of 500 of the largest U.S. publicly traded stocks — which is known as the S&P 500. The index has blessed investors with a 10% average annual return over the long term — and that’s a return any retiree would be thrilled to have.

You can own these 500 companies by purchasing an S&P 500 exchange-traded fund (ETF), such as the SPDR S&P 500 ETF Trust (NYSEMKT:SPY), the iShares Core S&P 500 Index Trust (NYSEMKT:IVV), or the Vanguard S&P 500 Trust (NYSEMKT:VOO). ETFs offer low fees and trade just like a stock, so you have a lot of flexibility when buying or selling them (although you don’t want to sell because you’ll lose access to that long-term 10% average).

And did I mention that each of those ETFs pays a dividend around 1.5%? So you’re getting growth AND a dividend! That’s a special added bonus for a retiree portfolio.

Autopilot is great when you’re driving, and even better when it comes to managing your portfolio. By purchasing an S&P 500 index fund for continued growth during retirement, you can hop in your car and drive wherever your heart desires — while collecting that average annual return of 10%. Other than visiting your grandkids, there’s nothing sweeter than that.