What exactly makes a great retirement stock, anyway?
Personally, I’m partial to a few different qualities, including:
- A steady business that will hold up in a recession
- A monthly dividend
- A company with some growth potential
- A quality business ran by a good management team
These features, combined with a diverse portfolio, should be enough to help a retiree convert their nest egg into an asset that spins off plenty of predictable cash flow each month. In fact, the underlying businesses should expand enough to ensure a growing income stream that keeps up with inflation.
Here’s one of my favourite stocks to help you get your portfolio retirement ready.
Canada’s top restaurant stock
A&W Revenue Royalties Income Fund (TSX:AW.UN) is one of the best-kept secrets on the entire Toronto Stock Exchange.
A&W is Canada’s second-largest burger chain with some 900 locations from coast to coast. Franchisees own everything from full-sized restaurants in small towns to small kiosks located in dense urban areas. This flexibility will ensure the chain continues to have a robust presence wherever hungry Canadians congregate.
A&W has posted some impressive gains over the last couple years, including several quarters of over 10% same-store sales growth, an all-important metric in the restaurant world. The company has been buoyed by a focus on high-quality ingredients, successful promotions, and deals with the various food delivery apps.
Although recent numbers were a little disappointing — same-store sales were up a mere 1.5%, which would be a solid result from most other chains — A&W’s focus on delicious food and its clever marketing should ensure higher growth in the future. It’s only a matter of time until the chain comes out with another home run promotion.
The stock has been an excellent performer since its 2002 IPO. In fact, it has consistently grown investor wealth at a nice clip.
A&W shares debuted at just $10 each back in 2002. Shares currently trade hands at more than $37 each — but wait — there’s more. The company has also paid a dividend the whole time, including raising the payout on a regular basis.
Over the last 15 years, the stock has posted a total return of 14.8% per year, including reinvested dividends. That’s enough to turn a $10,000 investment into something worth a little more than $72,000.
You’d never expect a boring stock like A&W to put up that kind of return — a remarkable result.
Despite long-term success, however, A&W shares trade at a mere 15 times earnings. That’s the same multiple as the average TSX stock, but A&W has clearly been better than average, which means shares are a screaming buy today.
A big chunk of A&W’s long-term total returns are likely to come from its dividend. The monthly payout is $0.159 per share, which is good enough for a 5.1% yield.
A&W has been generous with dividend increases over the years, especially recently. It hiked the dividend six consecutive quarters in 2018-2019, only recently pausing that streak. Unlike other stocks in the sector, it doesn’t pay out 100% of its earnings. That gives investors a little peace of mind in case the company stumbles.
The bottom line
A&W is an excellent choice for any retirement portfolio. It has a well-established brand, a history of consistent growth, a solid dividend, and shares trade for a very reasonable valuation. Today is a good day to add shares of this long-term winner to your retirement portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns shares of A&W Revenue Royalties Income Fund. A&W Revenue Royalties Income Fund is a recommendation of Dividend Investor Canada.