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Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.
Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:
- Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
- Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
- Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
- Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.
Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.
So how does RAIT Financial stack up?
In order to check out the valuation of RAIT Financial (NYSE: RAS ) , we don't want to look at only its P/E ratio of 4.0. That may seem cheap, but really we don't know without looking at the ratio in historical context. Over the last five years, RAIT Financial's average P/E ratio has been 8.0, which is greater than the current ratio. This suggests that investors could be seeing an opportunity to buy RAIT Financial on the cheap right now.
RAIT Financial's dividend is 6.9%. This is tremendous; not only does RAIT Financial pay a dividend, but it pays more than the average company in the S&P 500. However, some REITs dividends can really vary depending on their interest income, so you might want to look into this one further to see if it's bound to blow up in the future.
Next, we want to ensure that RAIT Financial's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, RAIT Financial's earnings per share have declined by 34% annually. Unfortunately, RAIT has run into its own share of problems, and the financial collapse of 2008 and ensuing downturn certainly couldn't have helped either. So the company has been unable to grow earnings, which doesn't exactly mean that it won't in the future, but it's certainly not the greatest of signs.
One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that RAIT Financial will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, RAIT Financial has a beta of 3.7, which is pretty high. Generally speaking I like to see a beta below 1.2 for retirees.
Let's look at the competition
We've taken a look at RAIT Financial, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it is to understand that particular company. Here are RAIT Financial's stats when compared to three of its closest competitors:
5-Year Earnings Per Share CAGR
|Resource Capital (NYSE: RSO )||11.4||19.4%||(19.8%)||1.7|
|NorthStar Realty Finance (NYSE: NRF )||N/M||11.7%||N/A||1.3|
|Starwood Property Trust (NYSE: STWD )||10.7||10.2%||N/A||0.6|
Source: Capital IQ, a division of Standard & Poor's.
Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just RAIT Financial in isolation.
Of course, I can't decide for you whether or not this is the best stock for retirement, but it has passed two of the four tests, which at least shows that this stock has some promise. Of course you've got to decide for yourself which are the most important traits in a stock that you're looking for and make decisions based off that.
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