Future retirees face a tough dilemma when trying to decide which investments will increase their retirement savings, especially at a time when the rate of return on fixed-income assets, including government bonds, savings bank accounts, and other fixed-term deposits, is close to zilch. But for those willing to take a little extra risk, the best bet in this market is to go for income-producing stocks.
While there are many reasons to avoid the risk of investing in equities, diversifying a retirement portfolio and putting some portion of it into stocks can help give a meaningful boost to savings. And regardless of what’s happening in the markets, it’s always a good time to invest in good businesses which generate hefty cash flows and regularly reward stakeholders. This strategy means thinking long-term and buying into businesses as a partner, not as a trader.
FedEx Corporation (NYSE:FDX) is one such dividend stock that can be held for the next 20 or 30 years, depending on your retirement goal.
Delivery Giant Offering Long-Term Value
For growth-hungry investors, it’s probably the worst time to buy shares of delivery giant, FedEx. The global economy is on shaky ground. Both Europe and China are showing signs of a pronounced slowdown, while the U.S. is in a late stage of the growth cycle after a decade-long expansion. The risks to its economy are growing.
Global delivery businesses are a proxy for the global economy and generally give early warnings on the outlook for trade and business investment. That’s the reason FedEx stock has been hit hard, falling almost 30% over the last year.
However, for buy-and-hold investors seeking a good value stock to hang on to over the next 20 years, this pullback offers a good entry point to a company which has a huge economic moat, a term coined by Warren Buffett to define businesses with massive competitive power to defend their turfs. FedEx stock certainly fits into this category.
Trading at $177.98 at Friday's close, FedEx stock looks cheap when compared to its peers, after the significant downward correction of the past 12 months. Its price-to-earnings ratio of 15.68 is lower than the industry average of 25.84.
At the midpoint of management’s latest guidance range, FedEx is expected to earn an adjusted net income of $16.05 per share in its fiscal year 2019. That will be a modest 5% increase compared with the $15.31 per share earnings the company reported for fiscal 2018. That gives a forward earnings multiple of 11, indicating that FedEx stock is offering good value at current levels. The company reports Q3 earnings tomorrow, with analysts expecting an EPS of $3.14 and revenue of $17.62 billion for the quarter.
But earnings growth isn’t the only reason to buy shares in market-leading companies. The biggest attraction of these stable businesses is that they generate regular income for a retirement portfolio and that income continues to grow over time.
Currently, FedEx pays $0.65 per share quarterly dividend with an annual yield of 1.45%. This yield looks meager when compared to some high-yielding stocks in the market. But we would still prefer FedEx stocks over other, riskier, names because the company has a lot of room to grow its payouts.
Since 2013, the FedEx payout has grown from an annual $0.58 a share to $2.60 per share, a jump of 348% in just five years. Despite the stunning growth, FedEx still has a lot of room to grow its dividend with a paltry 17.27% payout ratio versus an industry average of 46.91%.
Bottom Line
Retirement investing is very different from buying shares for short-term gains. When it comes to generating wealth for your golden years, think like a business owner, not a trader. Diversify your portfolio by adding quality income stocks that pay growing dividends. FedEx is a good candidate if you’re embarking on this journey.