Although I am not approaching the official retirement age of 67 any time soon, I am someone who has always invested in ASX shares with the idea that they will one day allow me to retire early. Perhaps I will hang up the proverbial boots before age 67. Perhaps I won’t. But it will be nice to have the option. Not just any ASX share will do for my goals, though. It’s my belief that a stock that can fund a long and comfortable retirement – a retirement stock, if you will – needs to fulfil three criteria.
3 things to look for in a retirement stock
Firstly, it needs to demonstrate some signs of possessing what legendary investor Warren Buffett would call a wide economic moat. This concept refers to an intrinsic competitive advantage that a company can possess, which it can use to fend off its competitors and keep its customers coming back. That could be a price advantage, a powerful and trusted brand, or offering a good or service that customers find difficult to avoid using.
Secondly, it needs to have a strong and resilient earnings base. The world is an ever-changing and unpredictable place. As an investor, we need to be as confident as we possibly can that a company we invest our hard-earned dollars into will be able to make its crust in all kinds of economic weather. After all, if a retirement is to last for two, three, or even four decades, it must be funded by companies that can navigate whatever the world can throw in their way.
Thirdly, a company must be able to pay a reliable and meaningful dividend, preferably with full franking credits attached. When the rubber hits the road on our retirement, retirement stocks need to be able to pay us an income. We can never know for sure what kind of dividend a company will pay in the future. But it’s my belief that what it has paid in the past is one of the best indicators of what to expect going forward.
So, now that we have our three criteria unpacked, let’s talk about five retirement stocks that I think check all three boxes.
Coles Group Ltd (ASX: COL)
First up, we have the grocery giant Coles. Almost all readers would be familiar with this company thanks to its dominant network of eponymous supermarkets across the country. Coles also owns the Liquorland chain of bottle shops.
Coles clearly checks all three of our selection criteria. Starting off, it arguably possesses two moats: a well-known and trusted brand, as well as a clear price advantage when it comes to food and household essentials. Most people would assume that their local Coles store is one of the cheapest places to do the weekly grocery shop, and that the products that Coles sells can’t be purchased at a meaningfully lower price elsewhere.
It also has one of the most resilient earnings bases on the ASX. We all need to stock our households with food and essentials on a regular basis. That is irrespective of whether the economy is booming or busting, or whether inflation is high or low. As such, it is pretty clear that Coles will have customers walking through the door no matter the economic weather outside.
Coles also has an exceptional dividend track record. It has paid a reliable dividend every six months since it first hit the ASX in its own right back in late 2018. What’s more, Coles has managed to increase its annual dividend total every single year since then too. Given this company’s payouts also tend to come with full franking credits attached, I think this could be a great retirement stock.
Transurban Group (ASX: TCL)
Next, let’s talk Transurban. This is a company that any motorist in Sydney or Melbourne, and perhaps in Brisbane too, would be intimately familiar with. It owns the vast majority of this nation’s tolled arterial roads. This in itself is enough to tick our first box. A toll road network is, by definition, a form of moat, given that customers find it difficult to avoid using. This moat is widened by the fact that Transurban often enjoys exclusive, decades-long contracts which allow it to increase its tolls by at least the rate of inflation.
That bleeds into our second retirement stock criteria too. This exclusive right to roll some of the country’s most vital road corridors gives Transurban a highly defensive earnings base. Sure, it may see some reduced traffic if there is a severe recession. But given we will always need to get to work, and move goods around our cities, Transurban is a solid choice for a retirement stock, in my view.
This plays out in the company’s dividend history. Transurban has a staircase-like pattern of delivering dividend increases over the past two decades, with the only major hiccups coming in COVID-ravaged 2020 and 2021.
Telstra Group Ltd (ASX: TLS)
Our third retirement stock to discuss is Telstra. This telco is another household name, thanks to its long history as Australia’s major telecommunications provider. Not only does Telstra continue to benefit from this powerful brand association, it also enjoys another form of moat. This company’s mobile network is almost universally regarded as the best in Australia, covering many rural and regional areas that its competitors don’t.
This means that many customers have no choice but to use Telstra for their mobile connectivity.
Telstra’s nature as a telco provider also grants it a defensive earnings base. Fixed-line and mobile internet connectivity are vital, essential services in today’s modern world. If times do get tougher, consumers will arguably pull back on spending on many other things before they will cut back on their internet and phone use. That makes Telstra a fantastic stock for investors looking for a stable retirement investment.
Let’s talk cash now, though. Telstra is one of the ASX’s most famous dividend payers. It has always paid out a strong dividend, which usually comes with at least some franking credits attached. Telstra has been growing its annual payouts every year for many years now as well.
Commonwealth Bank of Australia (ASX: CBA)
Our penultimate retirement stock today is yet another company most Australians would be familiar with. Commonwealth Bank of Australia is, without question, our strongest and best-run bank. Like Telstra, it has a history as a government-owned company, which gives CBA a lot of legacy brand goodwill.
That forms part of CBA’s moat, which is supplemented by its status as our largest bank, lending CBA strength and scale.
However, CommBank is probably our least resilient stock on this list. Banks are notoriously vulnerable to economic shocks, given the crucial role they play in providing credit in the economy. CBA has cut its dividend in the past when the economy has been under pressure. Saying that, this bank’s payouts have always bounced back quickly and have gone on to hit new heights. Over the cycle, CommBank should provide a healthy stream of fully-franked dividend income, and thus, makes for a valuable retirement stock.
Wesfarmers Ltd (ASX: WES)
Our fifth and final retirement stock is not exactly a household name. However, the plethora of successful Australian companies that it runs most certainly are. Wesfarmers is the sprawling industrial and retailing conglomerate behind Bunnings Warehouse, OfficeWorks, Target, and Kmart. The company also owns a range of other businesses, which span from fertiliser and chemical manufacturing to healthcare and mining.
These high-quality individual businesses stitch together to form a formidable moat that surrounds Wesfarmers’ earnings base. The company has so many fingers in so many pies that it tends to survive just fine when economic conditions are tough, and thrive when optimism returns.
Wesfarmers has a long history of looking after its shareholders. The company has delivered above-market returns for decades, coming from both capital growth and a rising dividend.
Wesfarmers has always paid a reliable dividend, which usually comes with full franking credits attached. 2026 was the sixth year in a row that investors have enjoyed an annual dividend pay hike. Given this ASX share’s long-term focus and diverse earnings base, I think it can be called the perfect retirement stock.
The post I look for 3 things in a retirement stock. These 5 shares have them all appeared first on The Motley Fool Australia.
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Motley Fool contributor Sebastian Bowen has positions in Wesfarmers. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Transurban Group and Wesfarmers. The Motley Fool Australia has positions in and has recommended Telstra Group and Transurban Group. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
