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 PotashCorp (NYSE: POT) 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 PotashCorp.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $46.1 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 4 years Pass
Stock stability Beta < 0.9 1.06 Fail
  Worst loss in past five years no greater than 20% (49.0%) Fail
Valuation Normalized P/E < 18 27.19 Fail
Dividends Current yield > 2% 0.5% Fail
  5-year dividend growth > 10% 21.0% Pass
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 5.6% Pass
       
  Total score   5 out of 10

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

With only five points, PotashCorp isn't giving conservative investors everything they'd want in the ideal stock. With a very small dividend and volatility in its share price, the fertilizer maker may be tapped into profitable trends, but it probably won't give shareholders a smooth ride while it builds its future.

As a producer of potash, a key component in fertilizer, PotashCorp has benefited from the rise of the emerging-market middle class. Despite concerns that the China story may start to slow down, increasing demand has pushed food prices higher, boosting prospects for not just fertilizer stocks but also farm equipment makers like Caterpillar (NYSE: CAT) and Deere (NYSE: DE). That story motivated BHP Billiton (NYSE: BHP), which has also benefited strongly from Chinese growth, to make a takeover bid for PotashCorp last year. After being rejected by the Canadian government, though, BHP formally withdrew the offer -- yet shares have stayed high regardless.

Unfortunately, although PotashCorp has strong growth prospects, it's also priced as if those prospects were a sure thing. With much higher valuations than peers like Mosaic (NYSE: MOS) and Terra Nitrogen (NYSE: TNH), PotashCorp seems poised to tumble if the perfect scenario doesn't play out for shareholders.

For risk-tolerant investors with a long-term time horizon, PotashCorp has a lot of attractive features as an investment. But for retirees and other conservative investors, the lack of dividend income is a major black mark against the company. Unless you have the stomach for a bumpy ride, retirement investors may want to avoid buying shares of PotashCorp. 

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.