These Stocks Belong in Your IRA

Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Most people under the age of 35 don't put a lot of thought into their retirement. These people couldn't be more misguided. The power of compounding is the best tool an investor can have.

To add some frosting to the cake – combining a tax sheltered investment vehicle with say 20, 30, or 40 years of time to grow those investments can make a young person very rich later in life. If you buy the right companies and reinvest the dividends, these companies will pile on the returns as the years slowly tick by.

There are some criteria I would use. Companies that are committed to rewarding shareholders are a must. The company must have a product or service that can endure the tests of time and its economic cycles. The company must also be financially healthy. These are some good ideas for starters.

Take comfort in this stock


Source: Yahoo Finance

Johnson & Johnson (NYSE: JNJ) is a consumer goods, pharmaceutical, and medical equipment conglomerate that operates worldwide. The healthcare sector will never go anywhere. With increasing opportunity as the population grows in volume, and in age, Johnson & Johnson is a major player in just about every healthcare industry you can think of.

Looking for some past performance to prove stability? Johnson & Johnson has increased its dividend annually for the last 51 years. Over the last decade earnings per share have grown 60%, cash flows have grown 71%, and dividends paid have risen by roughly 2.5 times. Johnson & Johnson is estimated to grow its earnings by 6% annually over the near term.

Johnson & Johnson is also pretty financially fit. It has a debt-to-equity ratio of only 0.2. It also has enough cash flow coming in to pay dividends, and add to its cash reserves. This healthy cash flow enables Johnson & Johnson to help itself grow through acquisitions (such as its recent purchase of Aragon Pharmaceuticals) as well as organically. Johnson & Johnson also has in house drugs in the trial phases such as Simeprevir (Hepatitis C) that can vamp up earnings if they make it to market.

Go for the (black) gold

Exxon Mobil (NYSE: XOM) is a fully integrated oil company that operates across the globe. It is the largest company in the world (if you are measuring by market cap).

Source: Yahoo Finance

Oil is a crucial energy source, and a foundation for the modern world. Oil is used to make many materials such as plastic, as well as power your car. There has been a big push over the last several years in the US to "go green", but I wouldn't worry. The chart below shows the estimated slow upward trend of projected oil demand across the world:

Exxon has shown a great stability involving its shareholder rewards over the years. Even with fluctuating earnings due to volatile oil prices, Exxon has raised its dividend annually 31 years in a row. Exxon has also been an absolute monster increasing its earnings per share 3 times, cash flow 3 times, and dividends paid twice over the last decade. S&P projects earnings to compound at 2% over the near term.

Exxon is also very healthy financially. Its dividends only account for a paltry 18% of cash flow per share. Exxon has about $9.5 billion in its pockets. This company is an absolute cash cow, and has plenty of room to keep that dividend moving higher. On top of that, Exxon is currently buying back about 1.2% of its shares every quarter. This will also help drive earnings per share higher moving forward.

A company such as Exxon doesn't need to do anything flashy to grow moving forward. Exxon has its hands in just about every oil-rich area of the globe, and oil prices will likely continue to push higher gradually over time. Exxon will look to focus on increasing its effectiveness in exploration and production moving forward. This will enable Exxon to extract more oil from harder to reach places, as well as drive its margins higher over time.

I'm loving it, and you should too

McDonald's (NYSE: MCD) is a fast-food franchise that operates across the globe.

Source: Yahoo Finance

McDonald's is the world's leading fast-food brand. While the world slowly looks to curb obesity, McDonald's brand power will help it resist large-scale changes in the market. Customer loyalty combined with a keen management team has enabled McDonald's to grow and reward shareholders consistently while the market around it changes.

McDonald's has been a "Big Mac" of dividend growth over the last decade. It has grown its dividend annually for 36 years. Would you like some growth with that? Earnings per share have multiplied by 4.5 times, cash flow by 3.3 times, and dividends paid by a little over 7 times (!) in the last 10 years. S&P estimates that McDonald's will compound earnings at 9% over the near term.

Is this fast-food giant healthy? It has more assets than liabilities with a debt/equity ratio of 0.8. The dividends consume only 48% of its cash flow per share. The upper management of McDonald's has proven very effective with a net profit margin of 19.78%. I believe strong management is essential for McDonald's moving forward as it looks to the Chinese and Indian markets for growth. McDonald's has had success tailoring its menus to the diverse markets it operates in.

Bottom line

These companies are all strong candidates for any type of investment account. Given each company's dividend growth commitment, strong market positions, and financial health moving forward - these companies will provide tremendous long-term returns.

If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.


Justin Pope has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and McDonald's. The Motley Fool owns shares of Johnson & Johnson and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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