Best Stocks For IRA in 2021


Best stocks for ROTH IRA, Traditional IRA, and SEP accounts. Portfolio of dividend and large cap stocks for IRA investing.



Best IRA Stock Portfolio


Note: Below is an asset allocation plan for an early retirement that will transfer to growth orientation in five years.

When my wife retired at the end of 2015 at age 61, we faced the common dilemma of early retirees—how to replace the loss of anticipated retirement income that comes with waiting until Full Retirement Age for Social Security. Not only do we have to adjust our spending to reflect a reduction of income from full salary to fractional pension, but buying health insurance under the Affordable Care Act increased our premiums about 200% along with a more-than-doubling of our deductible. The core problem until we reach Social Security age and Medicare eligibility is how to generate investment income but still maintain the principal in our investment assets.

My approach in this near-zero interest rate environment is to aggressively seek an overall average interest rate of at least 4% on the income-oriented portion of our portfolio. That level of return will generate enough income to cover expenses and not force us to dip into our principal for five years.

I took a six-pronged approach to finding that income:

  • Investment-grade individual corporate bonds
  • A diversified high-yield bond mutual fund
  • High-yield, high-quality dividend-paying stocks
  • High-yield stock ETF
  • A preferred stocks ETF
  • A Real Estate Investment Trust (REIT) mutual fund

Actually, the allocation breakdown is only four areas—high-yield stocks, high-yield corporate bonds, preferred stocks, and REITs. The mutual funds and ETFs provide additional diversification and safety. The individual issues allow for some outperformance if high-quality companies are purchased and outperform over the next five years.

With this diversification, I hope to achieve my target rate of return while spreading the risk as widely as possible. The common wisdom is that interest rates have nowhere to go but up, so any interest-sensitive investments are doomed to underperform in the future. However, pundits have been predicting an inevitable sharp increase in rates for about six years now, and the "inevitable" rise has yet to occur, assuming the Fed's token 0.25% increase to date does not qualify as a sharp increase.

Below are the portfolio's individual components, ticker symbol (except bonds), percent of the total portfolio, and annualized yield when purchased.

Security Symbol Annualized Yield (in %) Approximate Percent of Portfolio (in %)
Vanguard High Div. Yield ETF VYM 3.36% 8.9%
Procter & Gamble PG 3.23% 2.2%
Novartis NVS 3.70% 2.2%
Exxon Mobil XOM 3.70% 2.2%
Pfizer PFE 3.78% 2.2%
Amgen AMGN 2.76% 2.2%
Johnson Controls JCI 3.18% 2.2%
Gilead Pharmaceuticals GILD 1.84% 2.2%
Walmart WMT 2.86% 2.2%
Chevron CVX 4.49% 2.2%
Magellan Midstream Partners MMP 4.29% 2.2%
Market Vectors Preferred Securities X-Financials PFXF 5.89% 6.7%
Vanguard REIT Index Admiral Shares VGSLX App. 4.0% (due to 8 months of dollar-cost-averaging 17.8%
Vanguard High Yield Corporate Bond Fund VWEAX 6.09% 22.2%
American Tower Corp. 3.30% 3.28% 2.2%
Electronic Arts Inc. 3.70% 3.66% 2.2%
Enterprise Products 5.20% 2 Bonds 4.81% 4.4%
Gap Inc. 5.95% 5.58% 2.2%
LL-3 Communications Corp. 4.95% 4.79% 2.2%
L-3 Communications Corp. 4.75% 4.56% 2.2%
Scana Corp. 4.75% 4.44% 2.2%
Unum Group 5.625% 5.00% 2.2%
Western Union Co. 5.2535 4.80% 2.2%
Combined average yield on all securities 4.52%


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Dividend Stocks For IRA


It's difficult to break these assets cleanly into bonds and equities because REITs and preferred stocks are hybrids. Both pay high, relatively stable dividends similar to bonds but also fluctuate in value during trading hours and can be bought and sold like stocks. One can make a case that this portfolio is about 68.7% bonds (preferred + REIT + Bond fund + bonds). It's equally valid to say the portfolio is only 44.2% bonds (bond fund + individual bonds).

My goal wasn't to allocate a precise portion to bonds and stocks. My goal was to diversify across a variety of income-producing asset classes to achieve a high, relatively safe, recession-proof yield.

Another point to remember is that bond mutual funds, preferred stock ETFs, and REIT ETFs buy or sell individual securities over time. This will affect the dividends paid during each period (monthly or quarterly in most cases), which means yields are necessarily approximate and may change. Additionally, while most of the stocks in this portfolio have long-term track records of paying and increasing their dividends, there is no guarantee those dividends won't change or even be paid in the future. Many reliable dividend-paying companies slashed or eliminated their dividends during the recession of 2008-2009.


Best Stocks For IRA Conclusion


As indicated, my goal of earning at least 4.0% on this portfolio has been achieved. The lower-yielding stocks (such as GILD, WMT, AMGN) were all purchased while rated 5-stars by Morningstar, an indication of being undervalued. This suggests they may show above-average appreciation over time. Also, most stocks are well-regarded dividend payers with solid track records and a history of steady or increased payouts over time. This may boost overall yield in future years.

Importantly, this portfolio is all within a Rollover IRA, which was transferred from my wife's company 401(k) plan after she retired. The income produced will grow tax-free until withdrawn. With reinvestment of dividends in the stocks, ETFs, and mutual funds, the actual yield will grow through compounding. The bonds were all purchased with maturity dates between four and five years from now, which coincides with my planned realignment of the portfolio to a growth orientation from the present income orientation after five years.

Please remember this is only one portion of our assets. Other funds are invested in growth stocks, precious metals, and commodities. A small amount is kept in an account reserved for hedging and options. It is not a perfect portfolio, nor is it ideal for everyone. However, it works for us and our present situation. Only time will tell if I made some smart choices, but I'm comfortable with this portfolio for now—or at least until the next Black Swan event blindsides the global economy. However, that's a topic for another time.