Articles, Retirement

Top 16 Investments To Avoid In Retirement

Written By: Bob Ciura
Reviewed by: Mike Reyes
Last Updated November 9, 2023

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investments to avoid in retirement

Investors nearing retirement have different needs than investors with many years remaining in the workforce. Retiring means losing the regular paycheck from work, and as a result, replacing that income is a key consideration. Many investments appeal to retirement investors, such as purchasing quality dividend stocks like the Dividend Aristocrats. But there are also many investments that retirement investors should stay away from. Retirement investors should avoid the following 16 investments.

#1: Cash 

“Cash is king” is a well-known phrase, but when it comes to retirement investing, cash is hardly king. Retirement investors should avoid cash because it earns no return. In stark contrast to bonds, which pay interest, or stocks that pay dividends, cash earns no interest. As a result, cash loses value over time due to the steady erosion of inflation.

While retirees have several pressing challenges to pay for expenses without a paycheck from working, keeping a great deal of cash on the sidelines is not the best idea. Ideally, retirees can generate enough income from their investments, in combination with other sources of income such as Social Security, so they do not need to hold a large amount in cash.

Read more: How to Sell Covered Calls for Monthly Income

#2: High-Yield Bonds

Sometimes referred to as junk bonds, high-yield bonds are fixed-income securities issued by companies with sub-investment grade credit ratings. 

With interest rates still near historic lows, fixed-income yields have plunged over the past several years. As an example, the 10-year Treasury yields just 1.3% right now. With inflation running significantly above this level, retirees will see their purchasing power erode with low-yielding bonds.

Because of this, high-yield bonds are appealing due to their higher yields. However investors may be reaching for significantly elevated risk in their search for yield. Bonds with below-investment-grade credit ratings have a higher likelihood of default.

#3: Cryptocurrencies

Cryptocurrencies like Bitcoin are all the rage these days. The massive rise in Bitcoin and other cryptocurrencies over the past few years is enticing for any investor. Cryptocurrency gets a lot of coverage in the financial media.

But retirees need to remember that volatility is a two-way street. The bitcoin price has declined by nearly 50% from its 52-week high, a reminder that any investment can lose value. Bitcoin also does not pay interest or dividends, meaning investors will not generate income from their investments. Another reason retirees should avoid Bitcoin is simply the higher level of risk involved in buying cryptocurrencies, not to mention the tax implications.

#4: Oil & Gas Royalty Trusts

Oil and gas royalty trusts are niche securities within the stock market. These are companies that own oil and gas-producing properties. Investors receive distributions depending on how much income the trusts generate from these properties. Some well-known oil and gas royalty trusts include BP Prudhoe Bay Royalty Trust (BPH) and Permian Basin Royalty Trust (PBT).

As with any group, not all royalty trusts are bad investments. But the risks are high across the board—royalty trusts are essentially a bet on underlying commodity prices. Investors also have to face the prospect that reserves will decline faster than the trust had originally anticipated.

If oil and gas prices fall, share prices of the royalty trusts collapse, and their distributions decline, often to zero as occurred in 2020 during the coronavirus pandemic.

#5: Mortgage REITs

Real Estate Investment Trusts, also called REITs, are a great way for retirees to earn higher levels of investment income. Many REITs have strong yields of 4% or more. Retirees might be tempted to buy mortgage REITs, a subset of the asset class that typically offers even higher yields.

Indeed, historically, many REITs have double-digit yields over 10%. But in many cases, sky-high yields indicate elevated risks and mortgage REITs are no different. Mortgage REITs are extremely complex, financially architected business models that are not easy to understand, making them relatively poor choices for most retirees. In addition, mortgage REIT share prices and dividend payouts can swing wildly based on changes in the yield curve.

Read more: Diversify Your Portfolio With These Top 10 International ETFs

#6: Gold

Every few years or so, gold gets a lot of attention in the media, usually because the price of gold has risen over a certain period. But gold should be avoided for retirees interested in generating sustainable income from their investments.

Gold pays no dividends or interest, so it is unattractive for many retirees. To quote legendary investor Warren Buffett on gold: “The idea of digging something up out of the ground, in South Africa or someplace and then transporting it to the United States and putting it into the ground, in the Federal Reserve of New York, does not strike me as a terrific asset.”

Some gold stocks like Barrick Gold (GOLD) pay dividends, but their dividend track records are highly inconsistent. Many gold stocks have cut their dividends when precious metals prices decline.

#7: Momentum Stocks

Momentum stocks have captured investors’ attention, most often due to a rapid rise in their share price. This causes other investors to jump in, perhaps because of a fear of missing out, which can push share prices even higher. But in many cases, momentum stocks fall back down to Earth, as their underlying fundamentals may not justify the rallying share price.

In recent years, momentum stocks that have gotten much attention in the financial media include GameStop (GME), AMC (AMC), and more. In all cases, their share prices skyrocketed in a relatively short period. But retirees should resist the urge to buy momentum stocks, as they can be highly volatile and rarely pay dividends.

Read more: Dividend Kings With 50+ Years Of Dividend Growth

#8: Microcap Stocks

Stocks can be classified according to their market capitalizations, simply the current share price multiplied by the number of outstanding shares. Large-cap stocks have market caps above $10 billion, while small-cap stocks have market caps below $2 billion, with midcaps between these ranges.

The smallest group of stocks is known as microcaps. These are stocks with market caps below $100 million. Microcaps are very small businesses; their stocks generally have low liquidity, and many are in questionable financial condition. As a result, retirees should stick to midcaps and large caps.

#9: Stocks With Too Much Debt

Debt is a big concern for income investors such as retirees. Stocks with bloated balance sheets and too much debt are at high risk of cutting or suspending their dividends during recessions. Profits may decline substantially when the economy is downturned, but debt still needs to be repaid. 

Stocks with excessive debt have high-interest expenses that may force them to cut their dividends. This is of particular concern when it comes to high-yield Master Limited Partnerships, many of which have leverage ratios above 5x.

#10: Tesla Inc. (TSLA)

Tesla is a blue chip stock on the S&P500 with a market cap approaching $700 billion. But just because Tesla is a mega-cap does not imply a higher level of safety. That said, it doesn’t pay dividends and it’s one of the most volatile stocks on the S&P500. 

Read more: Don’t Miss These 12 Stocks Paying Monthly Dividends

#11: Netflix (NFLX)

Netflix is a major tech stock and a streaming giant. The company has grown its revenue at a very high rate over the past decade, as it has come to dominate the streaming industry. While Netflix is a top growth stock and a beneficiary of the ongoing cord-cutting trend, retirees should avoid it simply due to its high volatility and lack of a dividend.

#12: USA Compression Partners (USAC)

USA Compression Partners is an example of an MLP flashing warning signs that the high distribution may not be sustainable. USAC is one of the largest independent providers of gas compression services to the oil and gas industry, with annual revenues of $668 million in 2020.

The partnership is active in several shale plays throughout the U.S., including the Utica, Marcellus, and Permian Basin.  They focus primarily on infrastructure applications, including centralized high-volume natural gas gathering systems and processing facilities.  

The company has struggled to recover from the pandemic, which has squeezed its financial position. First-quarter revenue fell 12% year-over-year, while its distribution coverage declined to 1.03x, meaning the current payout is barely covered by distributable cash flow. If DCF declines further, the payout may be reduced.

#13: Great Elm Capital (GECC)

Great Elm Capital is a Business Development Company, otherwise known as a BDC. These stocks are popular among income investors because they generally have very high dividend yields. However, many BDCs are highly risky due to their eroding fundamentals and lack of dividend safety.

Great Elm Capital is an example of a BDC that should be avoided. Great Elm Capital is a BDC that specializes in loan and mezzanine middle-market investments. 

Net investment income decreased by 6% in the first quarter, a warning sign as the company can barely afford to maintain the current dividend. Furthermore, book value has eroded rapidly since going public in 2016.

While shares yield over 15%, investors should be wary of extremely high-yielding BDCs like Great Elm.

#14: GlaxoSmithKline (GSK)

International stocks are a great way for investors to gain diversification by geographic market, but not all international stocks are attractive for income investors.

Retirees should avoid GlaxoSmithKline because the company has had great difficulty generating growth in recent years. GlaxoSmithKline reaffirmed its expectation due to low expected growth in pharmaceuticals and vaccines.

As a result, the company is likely to have a very high dividend payout ratio, which could jeopardize its ability to maintain the dividend. GSK is relatively unappealing with many better healthcare stocks for retirees such as Dividend King Johnson & Johnson (JNJ).

#15: Anheuser-Busch InBev (BUD)

Anheuser-Busch InBev is the largest beer company in the world. The company produces, markets, and sells over 500 beer brands worldwide. Major global brands include Budweiser, Stella Artois, and Corona, generating nearly $50 billion in annual revenue.

But retirees typically want stable dividends and steady dividend growth over time, and AB-InBev is not an attractive stock for either. AB-InBev cut its dividend significantly over the past few years to fix its balance sheet, which had become bloated with debt after multiple huge acquisitions.

#16: (AMZN)

Amazon has been one of the best growth stocks in the entire market over the past decade—but for retirees who might want consistent portfolio income, Amazon is not an appealing stock. Amazon continues to grow its revenue at a high rate, and the company has become profitable.

Therefore, retirees could generate dividend income with other tech stocks like Apple (AAPL), Microsoft (MSFT) or Cisco (CSCO).

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