In retirement, a share market portfolio can be used to provide both stable income and modest growth. However it’s important to remember that, particularly in your later years, the share market is no place for money which will be needed within five years.
Long-term investing is, at a minimum, buy and hold investing which lasts more than five years. If you have any inclination that you may be in need of your funds within a shorter timeframe, you can increase your chances of losing money.
A model retirement portfolio
Depending on your risk tolerance (which can be hard to determine subjectively) a retirement portfolio will consist largely of blue-chip stocks such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS). However a retirement portfolio could also consist of a number of solid growth stocks, which will improve your chances of achieving market-beating returns.
One growth company which has proven long-term investing can be extremely rewarding is Cash Converters International Ltd (ASX: CCV). This small-cap stock has an international reputation which is rapidly growing through the rollout of new stores and services. Its payday loans business is embracing technology by providing online approvals. In addition the Carboodle business is rapidly growing sales. It has a 3.7% fully franked dividend yield. Keep an eye on this one.
Another reputable company with a growing presence throughout Australia is Shine Corporate Ltd (ASX: SHJ), the owner of Shine Lawyers. Although, in the lucrative Personal Injury (PI) market, it competes against heavyweight Slater & Gordon Limited (ASX: SGH), Shine is busy expanding into “emerging practice areas”, where it is seeking to capitalise on an unconsolidated market. In coming years it’ll grow both organically and acquisitively. It pays a 1.2% dividend.
FSA Group Ltd (ASX: FSA) is a rapidly growing loan provider to financially distressed individuals throughout Australia. I anticipate earnings will grow significantly when interest rates rise, because that will lead to a greater default rate. Recently management updated profit expectations for the full year and the share price jumped significantly. However, it trades on just eight times earnings and pays a 4% fully franked dividend.
Compared to the others, Macquarie Group Ltd (ASX: MQG) might be a much bigger blue-chip stock, but its potential to grow earnings in the long-term makes it a solid growth prospect. With a conservative balance sheet and exposure to worldwide equity markets, its earnings are likely to grow over time as funds under management increase and it draws more sales from niche finance areas such as M&A and commodities research. It’s forecast to pay a 4.9% dividend.
Here’s a BETTER buy
In retirement, the share market can be used for a reliable income stream, provided you pick the right companies to invest in. If you’re planning to retire 5 or 10 years from now, try and find reliable companies which offer smaller dividend yields but growing earnings per share, rather than simply going for the biggest dividend yield on offer today because, chances are, the larger dividend will increase at a slower pace.