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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 Darden Restaurants (NYSE: DRI ) 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 Darden Restaurants.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$6.4 billion||Fail|
|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||0.85||Pass|
|Worst loss in past five years no greater than 20%||(30.1%)||Fail|
|Valuation||Normalized P/E < 18||16.46||Pass|
|Dividends||Current yield > 2%||3.7%||Pass|
|5-year dividend growth > 10%||26.2%||Pass|
|Streak of dividend increases >= 10 years||7 years||Fail|
|Payout ratio < 75%||36.8%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With six points, Darden Restaurants doesn't completely satisfy the appetite of conservative investors. But the company's strong dividend growth puts the lie to the idea that restaurant stocks are endangered investments these days.
Darden is the company behind popular restaurant chains like Red Lobster and Olive Garden. One challenge that has plagued many casual dining establishments, including Brinker International (NYSE: EAT ) , is the rising price of food and beverages, which threatens to eat into already thin margins. But Darden has done a better job than most in keeping those costs under control, with a combination of fixed-price contracts and other cost-cutting.
More importantly, healthy restaurant chains are always looking to expand. With Chipotle (NYSE: CMG ) , McDonald's (NYSE: MCD ) , and Yum! Brands (NYSE: YUM ) all aiming for big expansions, Darden also expects to add 80 to 90 new restaurants by next May. That said, long-term revenue growth has lagged well behind many of Darden's peers.
What has to make retirees and other conservative investors happy is Darden's commitment to healthy dividend payouts. With huge growth in recent years, those dividends look quite sustainable even at a yield approaching 4%. Investors who are hungry for income and growth potential should give Darden a closer look.
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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."