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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 IBM (NYSE: IBM ) 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 IBM.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$204 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.74||Pass|
|Worst loss in past five years no greater than 20%||(20.8%)||Fail|
|Valuation||Normalized P/E < 18||17.13||Pass|
|Dividends||Current yield > 2%||1.6%||Fail|
|5-year dividend growth > 10%||26.2%||Pass|
|Streak of dividend increases >= 10 years||15 years||Pass|
|Payout ratio < 75%||21.5%||Pass|
|Total score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
IBM has been a tech stalwart for decades. Although it's considered a stodgy stock compared to high-growth tech names, IBM could play a valuable role in a retiree's portfolio.
Unlike its peers, IBM has focused leadership. The company's slow but steady strategic plan emphasizes research and development, enabling it to maintain its direction without having to make costly diversions to fill in important gaps. To see the value of that strategy, consider companies that haven't followed it. Both Hewlett-Packard (NYSE: HPQ ) and Dell (Nasdaq: DELL ) have missed key trends, and had to make expensive acquisitions to get back on track.
From a shareholder perspective, IBM has also committed to giving investors a stable income stream. While Oracle (Nasdaq: ORCL ) only started paying a tiny sub-1% dividend two years ago, and Cisco (Nasdaq: CSCO ) only now plans to start paying a dividend, IBM has been steadily raising its dividend for 15 years. That growth has accelerated in recent years, as the stock has made sharp gains.
With only minor blemishes on the 10-point scale, IBM is worth looking at. Conservative investors have to be pleased with its combination of decent income and future growth prospects.
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.
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