In investing, age and risk are inversely proportionate. As we age, we have to reduce our risk tolerance but that does not mean we have to pull out of the market and take a completely passive approach to our investing.
The reason we have to lower our risk tolerance is that as we get closer to retirement we have fewer years to make back any losses that we take in the market. In our 20s we can afford to buy into risky investments because we have our whole working career ahead of us, but that is not the case as move into our 40s or 50s.
One approach is to pull your money out of stocks and invest simply in exchange-traded funds that track the overall market or specific sectors. This is a prudent approach, and while you should consider allocating a certain percentage of your portfolio into low-risk positions, you have to keep some money at work in stocks.
There are plenty of high-quality stocks in the market that you can use to grow wealth in your 40s with reduced risk. Here are a few such names to consider.
Waste Management (WM)
There are few things as guaranteed in life as garbage. Garbage and recycling will always have a market, and as populations expand so will the sector. The garbage sector has huge barriers of entry, and leaders in the sector like Waste Management (WM) face little pressure from new competition and enjoy strong pricing power as a result. Waste Management has enjoyed strong and steady gains over the last five years as earnings have risen 14.4% annually. Looking ahead analysts see more of the same with forecast earnings growth of 10.5% per annum for the next five years. Given the stock’s recent and expected earnings growth, WM has an attractive valuation with a forward P/E of 22. Waste Management is also a strong dividend play with a 15-year streak of increases and a 1.9% yield. WM trades at $106.50 with an average price target of $108.33.
The world is quickly moving towards a “cashless” society and payment processors like credit card company Visa (V) will continue to benefit from the shift. Visa has enjoyed strong growth in recent years with profits up 20% per annum over the last five years and analysts see earnings growth of 16% annually for the next five years. The stock has traded steadily higher over the last five years and V is currently trading just pennies below its all-time high. Analysts see additional upside from the stock’s record high with an average price target of $171.09 versus the current price of $161.90. V trades 26 times future earnings which is a bit high, but given the growth estimates the stock should build on recent gains as long as the company is able to keep pace with future estimates.
Home Depot (HD)
Home Depot (HD) is the world’s largest home improvement retailer. With sizes comes pricing power and leverage with suppliers. The housing market will have its ups and downs, and while Home Depot will do best when the housing market is strong, the downside risk when the housing market falters is a risk that the overall market will face as well. Home Depot has done a good job growing its online business as well, with online sales rising just over 24% in 2018. Last year the company boosted its dividend 32% and the stock currently has a 2.6% yield and a six-year streak of increases. Earnings are up 21% per annum over the last five years and are expected to grow at an annual rate of 10.7% over the next five years. HD is approaching its record high of $215.43 at $206.89 and analysts have an average price target of $204.74. HD will report its next set of quarterly numbers on May 21 with analysts forecasting earnings of $2.19 per share, up from $2.08 during the same period last year.
Johnson & Johnson (JNJ)
One of my top stocks is Johnson & Johnson (JNJ), which is a stock I like for multiple reasons. One reason to like Johnson & Johnson is the company’s diverse revenue streams. JNJ has revenue streams in consumer products, pharmaceutical and medical devices and instruments. Investors are most aware of the company’s consumer goods, but they account for just 18% of the company’s sales while medical devices and pharmaceutical divisions account for the remainder. Another reason to like JNJ is the company’s capital program. Johnson & Johnson is a dividend aristocrat with a 56-year streak of dividend increases and the stock is currently yielding 2.6%. Johnson & Johnson trades at just 15 times future earnings which are forecast to rise 6.6% per annum over the next five years. The stock’s diversity and strong dividend program makes it a great stock to buy to grow a portfolio’s value. JNJ trades at $139.82 with an average price target of $146.77.