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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.
Banks have been hazardous to a lot of investors' retirement in recent years. But while U.S. banks such as Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) saw their shares plummet in response to the near-fatal financial crisis, conditions for Canadian banks such as Toronto-Dominion (NYSE: TD ) were much more favorable. With an aggressive expansion into the U.S., however, can the bank from the Great White North sustain its winning streak? 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 Toronto-Dominion.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$61 billion||Pass|
|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||3 years||Fail|
|Stock stability||Beta < 0.9||0.84||Pass|
|Worst loss in past five years no greater than 20%||(47.8%)||Fail|
|Valuation||Normalized P/E < 18||14.57||Pass|
|Dividends||Current yield > 2%||3.9%||Pass|
|5-year dividend growth > 10%||8.1%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||33.6%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of six, Toronto-Dominion fares a lot better than many banks would on our 10-point scale. Healthy dividend growth in particular makes TD stand out from most of its U.S. counterparts.
Believe it or not, Canada went through the same financial crisis that the U.S. did. But with a carefully regulated market, Canadian banks held up a lot better than American financial institutions. Perhaps the biggest reason for the difference is that strategic default on mortgages is much less of an option for Canadian homeowners, which has given them more incentive to address mortgage-related problems rather than simply walking away.
But unlike peer Royal Bank of Canada (NYSE: RY ) , TD and competitor Bank of Montreal (NYSE: BMO ) haven't been content to stay safe in the frozen north. Rather, they've looked to expand southward. In particular, TD has grabbed at opportunities to pick up U.S. banking assets on the cheap, including B of A's international credit card business.
The most impressive thing about TD for retirees and other conservative investors is its continuing ability to maintain and grow its dividends. In fact, the bank has raised its dividends twice already this year, after a brief two-year stretch of holding them steady during the financial crisis. And with far lower payout ratios than RBC, Bank of Montreal, or Bank of Nova Scotia (NYSE: BNS ) , TD has plenty of room to raise them further in the future. If you're looking for safer financial exposure without the risk that U.S. banks pose, TD is definitely worth 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."