Investing for retirement can be looked at in a number of ways. Some want to be conservative and just build a nest egg with time and compounding. Others want to take on a larger amount of risk, knowing they have years of work-related income left to make up for any losses.
The truth is, both are right. Even if one has decades of working years before needing retirement income, it’s probably not wise to be too aggressive trying to hit a multibagger for a windfall. Even some relatively conservative investments can turn into big wins over time, and combining those two approaches probably makes the most sense.
Here are two stocks to include in a portfolio that make good sense for a long investment time horizon.
Be open to some risk
Tesla (TSLA -0.48%) It has become a very profitable and successful company that still has years and decades of growth ahead of it. But it’s clearly not a cheap stock by conventional standards. That’s because investors see huge runway for the electric vehicle (EV) sector as well as Tesla’s energy business. Its stock recently traded at a price-to-earnings (P/E) ratio of around 52 based on 2022 earnings.
While analyst estimates vary widely, there is a real chance that Tesla’s 2023 earnings may not grow significantly. The company has lowered the vehicle’s price as competition has dramatically increased options for EV-seeking consumers. But it can still make a great investment for those who can overlook the potential lack of short-term returns.
Tesla is still in the early stages of expanding its two recently opened vehicle factories in Texas and Germany. It has already announced its fifth plant to be built in Mexico.
It is expanding its Gigafactory in Nevada to serve its battery and energy storage businesses, and it plans a new battery storage factory next to its vehicle plant in Shanghai.
All of these investments are being funded by cash from its existing operations as it continues to generate free cash flow.
When Tesla reports first-quarter 2023 earnings on April 19, there will be a lot of focus. All eyes will be on how the company’s pricing moves have affected its profit margins.
But cautious investors will also look to growth rates in businesses other than EVs. Those energy and charging segments led growth in the fourth quarter, and are now contributing meaningful amounts to Tesla’s revenue, as can be seen in the chart below.
While there are risks associated with its current valuation and increased competition, Tesla has plenty of potential. It may be a good fit for a portfolio for investors looking toward retirement.
Turn a little income into a lot
It is often said that past performance is not an indication of future results. But there are times when it’s worth looking at past records. Home Depot (HD 0.01%) One of those investments is worth it. Not just because of its highly successful business, but how it shares that success with investors. I can illustrate this with a personal story.
I bought shares in Home Depot just over 20 years ago. While share-price appreciation alone has provided a healthy 14% annual return over those two decades, that’s not the only benefit I’ll have in retirement. The stock offered an annual dividend yield of just 1.2% on that purchase in 2003. But management has consistently raised its dividend as business has thrived.
Now Home Depot’s current dividend yields 40% on my initial investment. Put another way, if you invested $10,000 in Home Depot stock in early 2003, you would now collect more than $4,000 per year in dividend payments.
That’s a useful income stream in retirement. And Home Depot’s business shows no signs of slowing down. It has made a recent push into the commercial segment to complement its residential customers. New homes will continue to be built and older homes will need to be repaired. As the share price continues to rise, so should its business.
This makes Home Depot not only a great income investment for retirement, but also a capital investment that can grow along the way. There is no reason to think that a company’s past performance will not translate into more positive results in the future.
Howard Smith has positions at Home Depot and Tesla. The Motley Fool has positions and recommends Home Depot and Tesla. Motley Fool has a disclosure policy.