What kind off stock is best for a retiree?
In a way, there’s no right or wrong answer to that question. Everybody has different needs. Some people retire young with millions in the bank, others retire at 70 scraping by on CPP and OAS. These differences have a major bearing on what a retiree should invest in.
Some investors prefer stocks, others bonds. There may even be some retirees who would be well off investing aggressive growth stocks. But for the vast majority of retirees, two investment priorities dominate over all others:
- Safety.
- Income.
When you’re retired, you can’t afford to lose it all on high-risk plays. So, safety is paramount. At the same time, you need steady income, to pay for your living expenses. So you need income.
Very often, these priorities lead retirees to buy bond funds. When safety and income are what the doctor ordered, bonds seem like the right medicine. But today, with bond interest failing to even come close to the inflation rate, bonds are probably not the best idea. Offering declining real purchasing power, they are more return-free risk than risk-free return.
Enter Royal Bank of Canada (TSX: RY)(NYSE: RY). Canada’s largest bank, it offers income a plenty, thanks to its 3.71% yield. It’s also a stable and proven financial institution, which helps it to satisfy the “safety” part. No, it’s not as safe as a bond fund or a GIC. But it’s about as safe as you’re going to find in 2021 while maintaining a fighting chance of beating inflation.
Rock solid stability
The first thing you need to know about Royal Bank is that it’s a very stable financial institution. Royal Bank does business mostly in Canada, which has a highly regulated and conservative financial services industry. What this means is that Royal Bank is not at grave risk of collapsing amid a banking crisis. U.S. banks do face this risk, judging by history. Canadian banks that do business mostly in Canada largely don’t. Royal Bank doesn’t have the growth potential of something like TD Bank, but if you’re looking for safety, it’s your bet.
Interest rate hikes incoming
Another reason why Royal Bank could be a good play for retirees is because the Bank of Canada is set to raise interest rates.
Banks are among the few businesses that can profit off interest rate hikes. When the central bank hikes rates, deposit interest goes up, but loan interest goes up even more. So, banks like RY can profit from the greater spread between the rate at which they borrow and the rate at which they lend. The end result is higher profit margins.
Now, I’m not saying that Royal Bank is guaranteed to make loads of money off interest rate hikes. As the Federal Reserve of St. Louis points out, there have been times when interest rates and loan margins moved in opposite directions. But banks can profit in high rate environments, which makes Royal Bank better positioned for such an environment than a non-bank firm would be — as non-bank firms incur higher costs when rates go up.
