Personal Finance

The Best Investments for an IRA

A line of increasingly larger piggy banks.

An IRA is a fantastic way to build long-term wealth, but it can be tricky knowing which stocks or ETFs are best to own in one. There are thousands of publicly traded companies and ETFs to choose from, and they don't all deserve a spot in your portfolio. How do you separate the good from the bad? It can help to establish some ground rules. For example, are you a growth investor, income investor, or value investor? Or are you a little bit of each? Our IRA center can help you figure out what approach is best for you, and then, it's time to get down to picking investments. To help get you started, here's one growth, one income, and one value investment I think you ought to consider buying in your IRA.

Getting in on growth

If your time horizon is 10 years, 20 years, or longer, investing in companies that are reshaping big and growing industries can be savvy. Disruptive companies can deliver significant revenue and profit growth that can fuel market-beating gains. For example, Alphabet transformed how we search and use information, Priceline turned the travel market inside out, and Netflix re-envisioned how we consume video entertainment. In each of these cases, investors savvy enough to tuck these stocks into their IRAs were rewarded with massive returns: Since 2004, these three companies are up 745%, 6,879%, and 8,121%, respectively.

A line of increasingly larger piggy banks.

Image source: Getty Images.

While any one of those stocks could still be worth buying in IRAs today, I think (NASDAQ: AMZN) might be an even better bet. Amazon is reshaping retail, and I think there's plenty of room left for sales to climb. Why? Because, according to the Census Bureau, e-commerce sales account for just 8.4% of total retail sales, and that's despite their growing 15% in the past year. I think e-commerce companies will continue chipping away at traditional retail, and if I'm right, then perhaps there's no company better positioned to benefit than Amazon. The company's already the biggest e-commerce company out there, and in 2016, Amazon's net sales increased 27% to $136 billion. That's pretty amazing growth for a company its size, but it may only be the tip of the iceberg. After all, Amazon's revenue is still only one-third of Wal-Mart 's revenue.

Amazon also manages data in the cloud for many of the country's biggest companies, and its Amazon Prime service is carving out an important presence in entertainment. If you're still not convinced, simply consider that Amazon's virtual assistant -- Alexa -- may only hint at how Amazon thinks it can transform our lives in the future.

Dividend heroes

Historically, stocks that pay dividends outperform their non-dividend paying peers, and because IRAs are tax-advantaged, those dividend payments can compound over time and potentially boost your retirement nest egg.

As a refresher, traditional IRAs are funded with pre-tax dollars, and dividends paid to investors on investments held in traditional IRAs aren't taxed until they're withdrawn in retirement. Alternatively, a Roth IRA is funded with after-tax dollars, so dividends paid on investments held in them may never be subject to income taxes, as long as you follow the rules regarding withdrawals. Additionally, unlike traditional IRAs, investors don't have to make withdrawals from a Roth IRA during their lifetime, so owning dividend stocks in Roth IRAs can really make a lot of sense.

If income investing sounds like your cup of tea, one way to go about owning dividend-paying companies in your IRA is to buy the Proshares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL) . This ETF owns about 50 mid- and large-sized companies that have increased their dividend for at least 25 consecutive years. If you buy this ETF, you'll gain exposure to household names like Clorox , McDonald's , and Walgreens Boots Alliance . You'll also get exposure to many lesser-known top dividend stocks like steelmaker Nucor, Inc .

Buying a bargain

When it comes to buying value stocks, I'm a fan of buying top-notch companies at fair prices. Thus, it may not be surprising that I think investors should own top-shelf healthcare stocks in their IRA, like Pfizer, Inc .(NYSE: PFE) .

With over $50 billion in sales and about $15 billion in adjusted income annually, Pfizer is a world-class leader in drug development and marketing, and since 76 million baby boomers are getting older and living longer, the demographic argument for owning Pfizer's shares is compelling.

Admittedly, drugmakers have gotten a lot of bad press lately because of their decisions on drug prices, but that bad press means investors can get this top stock at a 12% discount to its price last summer. Importantly, because new drugs and savvy acquisitions are fueling growth, rising earnings means investors are only paying about 12 times forward earnings estimates to buy Pfizer's shares.

Pfizer's dividend is another reason why this stock could be a smart buy for an IRA. Last year, the company returned $12 billion to investors via share buybacks and dividends, and in December, Pfizer's board of directors declared a $0.32 first-quarter dividend that's 7% higher than last year. With a healthy dividend yield of 3.93%, I think this stock makes a lot of sense for IRAs.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Todd Campbell owns shares of Amazon and Pfizer. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends GOOGL, GOOG, Amazon, Netflix, and Priceline Group. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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