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.
Consumer goods stocks get lots of attention whenever the stock market gets volatile. But unlike some higher-profile consumer stocks, Church & Dwight (NYSE: CHD ) flies under the radar for many investors. Is the stock a hidden gem, or is there a reason it hasn't grown to the size of some of its competitors? Below, we'll look at how the company 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 Church & Dwight.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$6.12 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of five past years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||5 years||Pass|
|Stock stability||Beta < 0.9||0.34||Pass|
|Worst loss in past five years no greater than 20%||4.4%*||Pass|
|Valuation||Normalized P/E < 18||21.96||Fail|
|Dividends||Current yield > 2%||1.6%||Fail|
|5-year dividend growth > 10%||36.9%||Pass|
|Streak of dividend increases >= 10 years||15 years||Pass|
|Payout ratio < 75%||29.1%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. *Smallest yearly gain; shares have risen in each of the past five years. Total score = number of passes.
With seven points, Church & Dwight has nearly everything that conservative investors like to see in a stock. And with the stock's quick dividend growth rate, it appears that the maker of household and personal-care products will only get better in the years to come.
Given problems both domestically and around the world, many investors have started to fear a possible new recession. That immediately draws attention to consumer giants like Procter & Gamble (NYSE: PG ) , Clorox (NYSE: CLX ) , and Kimberly-Clark (NYSE: KMB ) , which enjoy more stable demand even during economic downturns. Church & Dwight lacks some of the name-brand awareness that its larger competitors enjoy, but its faster growth rates put it in the same league as peers including Medifast (NYSE: MED ) and Herbalife (NYSE: HLF ) .
Earlier this year, Church & Dwight gave shareholders a nice surprise by doubling its dividend. That's not very common among mid-cap companies, but with a very reasonable payout ratio of less than 30% of the company's earnings, Church & Dwight has plenty of room to sustain future dividend growth.
For retirees and other conservative investors, Church & Dwight's 15-year track record of higher dividends demonstrates the company's commitment to its shareholders. The ideal situation would involve waiting on a pullback to make the shares more favorably priced, but even without it, Church & Dwight would make a reasonable addition to most 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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