One of the best means to accomplishing long-term financial success remains the Roth IRA, which is unfortunately too often under-utilized by the public.
Quite simply, the Roth IRA is a fantastic way to produce completely tax-free returns until retirement. Investors trying to simultaneously sock away more money for retirement and escape Uncle Sam’s greedy hands would do themselves a huge service by opening a Roth IRA.
And, since Foolish investors are always on the lookout for promising stocks to buy and hold, here’s three stocks that go perfectly with a Roth IRA.
The long-term rewards of a Roth IRA
There are two main types of Individual Retirement Accounts: the traditional, and the Roth. There’s a place for both, and they essentially offer opposing rewards.
With a traditional IRA, you’ll be able to deduct your annual contributions from your income tax, making for a tax bill that’s a little easier to swallow. However, you’ll have to pay taxes once you start to take your Required Minimum Distributions upon reaching a certain age.
At the other end of the spectrum is the Roth IRA. This is basically the reverse of the traditional IRA. You won’t be able to deduct contributions, but in return, you’ll enjoy the fruits of capital gains and dividends that are completely tax-free.
At the heart of the matter is whether you want to pay taxes now or later. In many cases, the Roth IRA is the best way to avoid taxes and generate the biggest returns, as many decades of gains and dividend reinvestment really add up.
Perfect stocks for the Roth IRA
AT&T Inc. (NYSE:T), the telecommunications giant, is an ideal stock for investors who take hefty dividend yields seriously. The company offers a 5% yield at recent prices, made possible by steady operating results and a business model that throws off lots of cash every quarter.
In its first-quarter, AT&T Inc. (NYSE:T) posted 12% higher quarterly diluted earnings per share year over year, and nearly $4 billion in free cash flow. The company’s second quarter results were equally strong. Diluted earnings per share rose nearly 8% on the back of 1.6% growth in consolidated revenue and more than two million new wireless and wireline broadband connections.
AT&T Inc. (NYSE:T) is committed to returning a significant portion of its cash flow to investors. Last fall, the company raised its dividend for the 29th year in a row.
Lockheed Martin Corporation (NYSE:LMT) investors have enjoyed dual rewards, both in terms of compelling income as well as huge capital gains, in recent months.
Lockheed Martin Corporation (NYSE:LMT) has soared 33% just to begin 2013, and that excludes the company’s hefty dividend payments.
It’s not hard to see why the defense giant is showing such strength, even in the midst of the ongoing sequester and the threat of further defense cuts going forward.
I’ve held Lockheed Martin Corporation (NYSE:LMT) for years, having felt all along the stock’s detractors were overly pessimistic about the likely effects of the sequester. Lockheed Martin Corporation (NYSE:LMT)’s underlying results have only reinforced my position. For all the uproar, Lockheed Martin Corporation (NYSE:LMT)’s second quarter sales fell just 4%. And, due to the company’s effective cost controls and share buybacks, Lockheed actually posted 10% earnings growth in the quarter.
At the same time, Lockheed Martin Corporation (NYSE:LMT) increased its full-year 2013 outlook for operating profit, EPS, and cash from operations. This will allow Lockheed to continue its track record of increasing dividends. Last fall, Lockheed raised its dividend by 15% after a 33% increase the year prior. All told, Lockheed has provided ten consecutive double-digit percentage increases in its shareholder payout.
On the subject of strong dividends, no discussion is complete without mentioning hamburger king McDonald’s Corporation (NYSE:MCD). McDonald’s Corporation (NYSE:MCD) is simply one of the most shareholder-friendly stocks in existence. McDonald’s Corporation (NYSE:MCD) has increased its dividend every year since its very first dividend in 1976, and through a combination of dividend payments and share buybacks, returns billions to investors every year.
Despite the slow-growing economy, McDonald’s Corporation (NYSE:MCD) remains resilient. Its recent quarterly net income rose 4% on the strength of a 1% increase in global same-store sales.
McDonald’s Corporation (NYSE:MCD) pays a 3.25% dividend yield at recent prices, and will surely increase its dividend at some point in the next couple months.
Ensure your financial future with a Roth IRA
If you own dividend stocks in a taxable account, you’ll have to fork over 15% of those distributions in taxes every year. And your tax bill could be even higher, depending on your income level.
The Roth IRA quite simply offers one of the best ways to enjoy years of tax-free returns. Moreover, if you fill your Roth with high-quality dividend stocks such as these, you’ll see your portfolio rise over time, thanks to the magic of compounding.
These stocks provide strong dividend yields that handily exceed the yield on the broader market, and have great track records of increasing their payouts regularly. For investors looking to save for retirement and also lessen the blow of taxes, do yourself a huge favor by opening a Roth IRA, and fill it with great stocks like these. I own Lockheed Martin and McDonald’s Corporation (NYSE:MCD) in a Roth IRA, and plan to reinvest those hefty dividends for many years to come, and I’d urge all Foolish investors to join me.
The article Why You Should Open a Roth IRA, and 3 Stocks to Fill it With originally appeared on Fool.com and is written by Robert Ciura.
Robert Ciura owns shares of McDonald’s and Lockheed Martin. The Motley Fool recommends McDonald’s. The Motley Fool owns shares of Lockheed Martin and McDonald’s. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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