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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 Royal Bank of Canada (NYSE: RY ) 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 Royal Bank of Canada.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$87.7 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||0.68||Pass|
|Worst loss in past five years no greater than 20%||(40.2%)||Fail|
|Valuation||Normalized P/E < 18||18.48||Fail|
|Dividends||Current yield > 2%||3.3%||Pass|
|5-year dividend growth > 10%||10.3%||Pass|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||55.7%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With a score of 6, Royal Bank of Canada has some attractive attributes for conservative investors. Unlike its bank cousins south of the border, RBC did a good job of sustaining its dividend throughout the financial crisis and is on sound footing to benefit from Canada's relatively strong economy.
At first glance, you'd think that the global threat to the financial system in 2008 would have knocked Canadian banks like RBC for as much of a loop as it did big U.S. banks like Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) . Those American institutions had to take drastic measures to shore up their finances, including slashing their dividends and accepting government bailouts.
By contrast, Canada's banking system discouraged exotic subprime mortgages and other sketchy practices that led to the financial crisis. Because of this along with strong growth from natural resources within the country, Canadian banks are much stronger than those in many other countries around the world.
Ironically, now that the U.S. economy has started to pick up, Canadian banks are looking south to try to tap the U.S. market. Competitors Bank of Montreal (NYSE: BMO ) and Toronto Dominion (NYSE: TD ) have made moves to build a bigger retail presence in the States, but RBC is headed in the opposite direction, looking to sell off its U.S. consumer banking operations.
Retirees and conservative investors may be justifiably scared of the financial industry right now. But with solid fundamentals and interesting growth opportunities ahead, Royal Bank of Canada could be a long-term winner for those willing to go back into the financial jungle.
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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