The 1 Stock You've Been Overlooking for Your Roth IRA | The Motley Fool (2024)

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A Roth IRA is a great way to save for retirement while growing your assets tax-free. But many investors may not be taking full advantage of the benefits that a Roth IRA offers. Certain stocks make more sense to hold in a Roth IRA than others, and getting it wrong could prevent your nest egg from reaching its full potential. Thankfully, a few of our Foolish contributors have some ideas.

Matt DiLallo: Real estate investment trusts (REITs) like Retail Opportunity Investments Corp. (ROIC 0.62%) are an oft-overlooked idea for IRA investors, Roth or otherwise. However, Retail Opportunity Investments is the perfect stock to own in a Roth because it shields investors from ever having to pay taxes on its big dividend. That will allow this income stream to not only compound tax-free until retirement, but provide tax-free income during retirement, which is a real win-win in my book.

Retail Opportunity Investments is focused on owning neighborhood shopping centers in middle and upper income markets in the Western U.S. Furthermore, these shopping centers are anchored by large supermarkets or drug stores, which has enabled the company to maintain strong occupancy rates despite rising competition from e-commerce. Overall, 55% of its portfolio is leased to these anchor tenants with an average lease term of seven years, which provides a stable base of cash flow to support its dividend.

In addition to that solid foundation, Retail Opportunity Investments continues to pursue an acquisition-driven growth strategy to scoop up additional neighborhood shopping centers, spruce them up, and then capture the upside from stronger lease renewals as traffic to the center grows. It's a strategy that has paid off very well in the past, with the company growing its dividend by 300% since 2009.

With ample growth opportunities ahead of it, Retail Opportunity Investments' dividend has the potential to keep growing for years to come. That's why investors don't want to overlook owning this stock in a Roth so they can keep all of this income to themselves.

George Budwell: Gilead Sciences (GILD 1.98%) is a stock that is probably not on the radar screens of traditional Roth IRA investors at the moment. After all, this blue chip biotech's share price has appreciated by an astronomical amount over the last five years, and it's begun paying a dividend, implying that the company's best years in terms of growth are already behind it.

However, I think Gilead remains a top-notch candidate for a Roth IRA due to its diverse clinical pipeline, strong cash flows, solid balance sheet, and perhaps most important, its patient management team that has eschewed high dollar M&As for longer-term growth opportunities. Gilead looks to me like a stock that still has a lot of room to run, even though the market seems to disagree right now.

While it's true that Gilead is in the cross hairs of the raging political storm over drug prices and its core hepatitis C franchise is under duress from the entry of potent new competitors, the biotech is slowly building out an intriguing pipeline of novel drugs for under-treated indications, such as non-alcoholic steatohepatitis (NASH), that are frankly being overlooked by this overly pessimistic market. With its latest acquisition of Nimbus Therapeutics for a mere $1.2 billion in total, for instance, Gilead now sports a diverse set of experimental therapies targeting deadly liver diseases such as NASH that have the potential to turn into blockbuster products down the road. And, perhaps the best part is that management has put this pipeline together without breaking the bank.

Diving a bit deeper, NASH is expected to become one of the fastest-growing drug areas in the near future due the fact that an estimated 200,000 Americans already have the disease, and physicians are becoming increasingly aware of its potential to create severe health problems in obese patients, especially those with diabetes. Although Gilead is far from alone in its quest to enter this particular high-growth market, its clinical efforts in the liver disease space do show that management is working diligently toward creating deep value for shareholders at a reasonable price tag.

All told, Gilead's under-appreciated clinical pipeline has the potential to drive monster levels of growth in the years to come, making it a compelling candidate for a Roth IRA.

Tim Green: A Roth IRA is a great way to avoid paying that pesky capital gains tax for holdings that appreciate substantially over long periods of time. A stock that offers both long-term growth potential and a nice dividend is ideal, since both capital gains and dividend payments will be free from Uncle Sam's clutches.

Cisco Systems (CSCO 1.23%) is no longer growing as rapidly as it once was, but the company's push to become a provider of IT solutions, not just a seller of networking hardware, positions it well for the future. Cisco's software and services businesses are growing faster than the company as a whole, and its core switching and routing businesses are cash cows, fueling share buybacks and a healthy dividend. After a recent 24% dividend hike, the stock yields 3.7%.

Cisco isn't going to be posting double-digit annual earnings growth, but it doesn't have to for the stock to appreciate significantly in the coming years. Backing out Cisco's cash net of debt, the stock trades for less than 9 times the trailing-12-month free cash flow. A combination of slow and steady growth, share buybacks, and the market eventually realizing that Cisco is undervalued has the potential to produce major -- and tax-free -- gains. And while investors wait, that sweet dividend keeps rolling in each and every quarter.