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.

When it comes to defense, Raytheon (NYSE: RTN) has the products you're looking for. From missiles to air defense and radar systems, combat communications to surveillance, Raytheon has a wide array of offerings to cover land, sea, and air applications. But with the government threatening the defense budget, will Raytheon take a big hit? Below, we'll revisit how Raytheon 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 Raytheon.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $17.7 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 3 years Fail
Stock stability Beta < 0.9 0.68 Pass
Worst loss in past five years no greater than 20% (14.2%) Pass
Valuation Normalized P/E < 18 10.71 Pass
Dividends Current yield > 2% 3.3% Pass
5-year dividend growth > 10% 12.4% Pass
Streak of dividend increases >= 10 years 7 years Fail
Payout ratio < 75% 31.5% Pass
Total score 8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Raytheon last year, the company has kept the same eight-point score. The stock has also held up relatively well against the assault on its core business.

Defense companies have been under fire ever since the ill-fated debt-ceiling deal last summer. With across-the-board cuts now in line to take effect, more bad news could be coming -- especially as the U.S. keeps pulling out of Iraq and Afghanistan.

One solution has been to find partners to work on cut-proof programs. For instance, Raytheon and Alliant Techsystems (NYSE: ATK) are trying to develop small guided bombs that unmanned aerial vehicles can carry and deploy against targets. It's also paired up with General Dynamics (NYSE: GD) on a guided missile destroyer program on which Raytheon makes the bulk of the electronics involved.

However, companies have to be picky about which projects to take on. The Pentagon wanted Raytheon to work with Ford (NYSE: F) on a big contract to make light tactical vehicles, but Ford turned it down, in part because of fears that the program would eventually get eliminated.

In addition, looking overseas for business is also increasingly fruitful. Boeing (NYSE: BA) announced a nearly $30 billion deal with Saudi Arabia, which will include state-of-the-art radar equipment from Raytheon.

For retirees and other conservative investors, the big question is whether Raytheon's general dividend yield and relatively stable share price can stand up to continued attacks on the budget front. Having already defended itself well, Raytheon is well-positioned to weather the storm and keep moving forward in the years to come.

Keep searching
 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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

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