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In your 40s? 3 stocks to consider buying

Perhaps the biggest advantage an investor in their forties has over other age groups is that they still have time on their side.

With retirement for most still at least two decades away, this offers a significant opportunity for workers in their salaried prime to buy a portfolio of “long-term compounders.”

So what constitutes a long-term compounder?

This is the type of company which investors like Warren Buffett focus on buying. They’re companies with good long-term growth prospects and the ability to reinvest their profits at an attractive return, allowing those reinvested profits to compound.

Here are three companies which could be worth considering.

Ramsay Health Care Limited (ASX: RHC)

The health care sector is a prime growth sector for the economy and is set to benefit from a long term tailwind. Add in the defensive characteristic of the sector and there is plenty to like about health care companies.

Retaining and reinvesting profits has helped Ramsay to expand its earnings per share (EPS) from 55 cents per share (cps) 10 years ago to 221 cps for the 12 months ending 30 June 2016. The total shareholder return (TSR) has been a corresponding 25.2% per annum (pa) over the past decade.

With a forward price-to-earnings ratio of 56 times Ramsay isn’t short term cheap. However, with plenty of opportunities overseas, if you take a long term view there is potential for Ramsay to grow into its valuation.

REA Group Limited (ASX: REA)

While REA already has a dominant market-leading share of the real estate classifieds advertising market in Australia, its overseas operations have plenty of scope for future growth.

These growth opportunities mean that despite strong cash flow, REA Group only pays out around half of its earnings as dividends.

That capital allocation decision looks well founded considering the 30.8% pa TSR achieved over the past decade which has accompanied a rise in EPS from 12 cps 10 years ago to 168 cps in FY 2016.

TPG Telecom Ltd (ASX: TPM)

The share price of telecommunications provider TPG has been severely sold down in recent months which could have opened up a window of opportunity for long-term investors.

TPG has undertaken an aggressive acquisition strategy in recent years to expand its market share. This has been funded via a mixture of debt and equity which has consequently entailed a low dividend pay-out ratio.

With EPS growing from just 1.6 cps a decade ago to 38.3 cps in FY 2016 and a 10-year TSR of 31.4% pa, compounding the group’s retained earnings looks to have been the right move by the board and management.

Foolish takeaway

While the outlook appears bright for each of the three companies mentioned above, it is important to remember that even if a sector has good prospects that doesn’t mean individual companies will automatically benefit.

One major risk is competition. For example, REA Group shareholders must remain alert to new entrants which in the future may displace REA’s current grip on the property advertising market. (source: CommSec)

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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