Is Consolidated Edison the Right Stock to Retire With?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Consolidated Edison (NYSE: ED  ) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Consolidated Edison.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $14.6 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.31 Pass
  Worst loss in past five years no greater than 20% (15.7%) Pass
Valuation Normalized P/E < 18 14.88 Pass
Dividends Current yield > 2% 4.8% Pass
  5-year dividend growth > 10% 0.9% Fail
  Streak of dividend increases >= 10 years 37 years Pass
  Payout ratio < 75% 63.4% Pass
       
  Total score   8 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With eight points, Consolidated Edison gives conservative investors the right combination of energetic growth opportunities and solid dividend income. As a utility, ConEd is in an industry that many retired investors have traditionally relied on for their retirement income portfolios.

Conservative investors like utilities such as ConEd because they tend to have similar traits. Look at peers Southern Co. (NYSE: SO  ) , Duke Energy (NYSE: DUK  ) , and CenterPoint Energy (NYSE: CNP  ) , and you'll see much the same combination of reasonable valuations, low beta, and strong dividend yields.

What sets ConEd apart, however, is its relatively low payout ratio. Each of the three competitors listed above pays out at least 70% of its income out as dividends, while ConEd's figure around 63% gives it more latitude to weather possible storms in the utility markets going forward.

In addition, the company has a very long history of making annual increases to its dividend. ConEd is among the few companies that qualify as Dividend Aristocrats, which have 25-year streaks of dividend hikes.

With utility regulation still strong, ConEd is unlikely to become a big growth stock anytime in the future. But for retirees and other conservative investors looking for dependable dividend income, ConEd would make a good addition to your retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Consolidated Edison to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Southern Co. is a Motley Fool Income Investor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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