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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 Wal-Mart (NYSE: WMT ) 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 Wal-Mart.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$194 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||5 years||Pass|
|Stock stability||Beta < 0.9||0.31||Pass|
|Worst loss in past five years no greater than 20%||(2.6%)||Pass|
|Valuation||Normalized P/E < 18||13.83||Pass|
|Dividends||Current yield > 2%||2.2%||Pass|
|5-year dividend growth > 10%||17.8%||Pass|
|Streak of dividend increases >= 10 years||36 years||Pass|
|Payout ratio < 75%||29.2%||Pass|
|Total score||10 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Wal-Mart becomes the first stock I've looked at to score a perfect 10 on the factors that are important to retirement investors. Its combination of solid dividends, steady growth, and dependable share performance vaults it into the highest echelon of U.S. companies.
During the bull market of the mid-2000s, Wal-Mart's shares struggled as the company faced the inevitable cooling off of its torrid pace of growth from previous decades. The company faced criticism that it had matured into a low-margin, no-growth company like many other megacap stocks.
But when the economy came crashing down, customers rediscovered bargain shopping, and investors took up the theme. While smaller discount retailers Family Dollar (NYSE: FDO ) , Dollar Tree (Nasdaq: DLTR ) , and Dollar General (NYSE: DG ) have reaped huge share gains from the resurgence of interest in bargain retail, Wal-Mart has taken advantage of the opportunity to jump-start its business by appealing to a set of customers who had previously been able to pay higher prices to competitors.
Of course, retail is still a tough business, with Target (NYSE: TGT ) and Costco (Nasdaq: COST ) constantly nipping at Wal-Mart's heels. But Wal-Mart stock has been just about the perfect investment lately. It avoided big losses in the 2008 bear market and pays a 2.2% dividend. Its dividend payouts have risen annually without fail for decades, yet its earnings are more than ample to support its payments. Wal-Mart isn't going to be a multi-bagger stock in any short-term timeframe, but as a long-term holding, it's a great value right now and would make a fine addition to a conservative retirement portfolio.
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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