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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.
Among dividend-paying stocks, it's hard to find a company with a better track record than Dover (NYSE: DOV ) . With well over a half-century of annual dividend increases, the stock has been kind to long-term shareholders. But is the machinery company in a position to continue that history to produce another 50+ years of better payouts for investors? 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 Dover.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$10.3 billion||Pass|
|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||1.35||Fail|
|Worst loss in past five years no greater than 20%||(26.9%)||Fail|
|Valuation||Normalized P/E < 18||15.08||Pass|
|Dividends||Current yield > 2%||2.3%||Pass|
|5-year dividend growth > 10%||10.3%||Pass|
|Streak of dividend increases >= 10 years||56 years||Pass|
|Payout ratio < 75%||26.1%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With seven points, Dover has much of what conservative investors like from the stocks they own. The company has a wide range of businesses, and together, they've managed to produce the cash flow needed to keep its impressive dividend streak alive.
Dover makes industrial products with an emphasis on machinery, including truck bodies and powertrain systems, off-road-vehicle accessories, and internal engine components. It also provides materials used in gas well production, as well as refrigeration and heating systems for food services and commercial kitchens.
Despite its long history, Dover isn't just a stolid, conservative company. Earlier this year, it completed the acquisition of the Sound Solutions business of NXP Semiconductors (Nasdaq: NXPI ) , which will help Dover provide speakers and receivers for cellphones and other consumer electronics.
Recently, Dover decided to realign its business into four different business segments. With communication technology, energy, engineered systems, and printing and identification, each segment will have its own unit CEO, helping Dover compete better against peers including Cooper Industries (NYSE: CBE ) and Ingersoll-Rand (NYSE: IR ) .
For retirees and other conservative investors, Dover's main selling point is its dividend streak, which outpaces nearly every other U.S. company, including rivals such as 3M (NYSE: MMM ) , Illinois Tool Works (NYSE: ITW ) , and United Technologies (NYSE: UTX ) . For a solid company with dependable results and the prospects for growth down the road, Dover 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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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."