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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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Sometimes when you're looking at a company to help manage your assets, you're better off buying shares of the company itself rather than that company's funds and other investing vehicles. Looking at its long-term track record of strong performance, T. Rowe Price (Nasdaq: TROW ) definitely looks like one of those cases. Below, we'll look at how T. Rowe Price does on our 10-point scale.
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 T. Rowe Price.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$13.3 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of past five 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||1.64||Fail|
|Worst loss in past five years no greater than 20%||(40.6%)||Fail|
|Valuation||Normalized P/E < 18||17.86||Pass|
|Dividends||Current yield > 2%||2.4%||Pass|
|5-year dividend growth > 10%||16.7%||Pass|
|Streak of dividend increases >= 10 years||24 years||Pass|
|Payout ratio < 75%||39.4%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
T. Rowe Price gives conservative investors almost everything they'd want with its score of 8. Even though the stock market has generally been a mixed bag for investors, this asset management company has made the most of the volatility and has looked particularly healthy lately.
The financial sector is full of land mines, with banks carrying bad assets and economic threats around the world. But through it all, T. Rowe Price has managed to epitomize blue-chip excellence, with half a trillion dollars under management and a definite niche in the no-load mutual fund industry.
The trick is to make sure that you win no matter which way the market goes. Just as private equity companies Blackstone (NYSE: BX ) and Fortress Investment Group (NYSE: FIG ) routinely generate huge profits from their asset-based fees, fund companies like Franklin Resources, Legg Mason (NYSE: LM ) , and T. Rowe Price pull in the cash from annual management fees.
Interestingly, though, T. Rowe Price has been a big player in the social networking space, grabbing up stakes in Facebook, Groupon, Twitter, and Zynga, among others. Given the popularity of Chinese Internet plays Renren (NYSE: RENN ) and E-Commerce China Dangdang (NYSE: DANG ) , as well as the U.S. IPO of LinkedIn (NYSE: LNKD ) , getting in early is a calculated bet that could help T. Rowe Price cash in if social media manages to go public before the bottom falls out of the market.
For retirees and other conservative investors, a near quarter-century record of steadily rising dividends is probably the best sign of a good thing. Although its shares have bounced around quite a bit during the recent turmoil, T. Rowe Price still deserves strong consideration for retirement portfolios.
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.