Fund a Roth IRA and Fill it With These Stocks

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

Investors are constantly under a deluge of financial advice. With so many options and different types of investment vehicles and strategies, it’s no wonder most individuals feel overwhelmed by the prospect of retirement saving. However, planning for one’s financial future is a pivotal task, the importance of which cannot be understated.

One option nearly all investors would be wise to take advantage of is the Roth Individual Retirement Account (IRA), which allows a person to contribute money each year, albeit not deductible from one’s taxes, that will grow tax-free until retirement.

In that vein, since all capital gains and dividends are tax-free within a Roth, it’s generally advisable to keep high dividend stocks in a Roth. With that in mind, here are some great candidates for a Roth IRA.

Enjoy years of tax-free dividends

Some of the market’s best blue-chip stocks pay dividend yields nearing 5%. While interest rates are at historic lows and the markets keep surging to new highs, it’s still possible to capture high dividend yields without resorting to speculative companies you’ve never heard of.

Several well-known and well-managed businesses, including Altria (NYSE: MO) and Lockheed Martin (NYSE: LMT) pay dividend yields very close to 5% annualized.

Tobacco king Altria is the gold-standard for dividend-paying stocks and maintains a stable of well-known products that cater to our vices. Its tobacco offerings include Philip Morris USA, which holds the juggernaut Marlboro brand. Through its acquisition of UST Inc., Altria has smokeless tobacco offerings including the Skoal and Copenhagen brands. Altria also owns Ste. Michelle Wine Estates, John Middleton cigars, and a stake in brewing company SAB Miller.

Defense giant Lockheed Martin produces prodigious free cash flow, which it uses to generously reward shareholders with share buybacks and rising dividends. While you might be reluctant to allocate capital to the defense industry in the middle of the ongoing sequester, it’s worth noting that the reality of the world we live in is that governments are constantly encountered with new security challenges.

Despite possible budget cuts to defense, Lockheed Martin expects its operating margin to remain stable going forward, and it continues to be committed to returning at least 50% of free cash flows to investors through dividends and share repurchases. Lockheed has increased its dividend by more than 22% annually over the last five years.

While BP (NYSE: BP) has undoubtedly been adversely affected by the 2010 Gulf of Mexico spill, the company has shown measurable progress since then. To date, BP has paid more than $24 billion in expenses related to the oil spill, and BP management has estimated it will pay a total of $42 billion to fully resolve its liability for the disaster.

While $42 billion is surely a gigantic sum, a resolution of the ongoing trial represents closure once and for all. Meanwhile, BP has quietly pumped out rising dividends to shareholders in the interim. After suspending its dividend in the wake of the 2010 spill, due mostly from political pressure as opposed to actual financial reasons, BP quickly got back in high-dividend mode in early 2011. The company initially resumed its dividend at half the level it was paying pre-spill, but the company has raised the distribution twice since then to its current level.

Ensure your financial future

If you own dividend stocks in a taxable account, you’ll have to pay at least 15% of those distributions in taxes. Depending on your income level, you might even have to pay a higher rate than that going forward.

Some of the market’s best dividend stocks provide yields that trounce the income you’ll produce from traditional bank products like savings accounts or certificates of deposit. As a result, you’ll want to keep as much of those payouts in your own pocket as you can, and the Roth IRA is a great way to do just that.

These stocks provide an average yield of nearly 5% annually, and since these three companies in particular have long track records of raising dividends regularly, you can be sure your portfolio yield will only grow in the future. I own all three of these companies in a Roth IRA, and I would encourage my fellow investors to join me in securing our financial futures.

Altria has been the best-performing stock of the past 50 years, but as the number of smokers in the U.S. continues to steadily decline, is Altria still a buy today? To find out whether everyone’s love-to-hate dividend stock is a savvy investment choice or a hazard to your portfolio, simply click here now for access to The Motley Fool's premium research report on the company.


Robert Ciura owns shares of Altria Group, Lockheed Martin, and BP p.l.c. (ADR). The Motley Fool owns shares of Lockheed Martin. 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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