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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.
You may never have seen an actual physical Intel (Nasdaq: INTC ) product, but the company's chips are inside a huge range of technological devices you use every day. With particular strength in the PC market, Intel has been a leader in its industry for decades. But as mobile device use picks up, can the company extend its strength to the highly competitive mobile market? Let's revisit how Intel 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 Intel.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$141 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||3 years||Fail|
|Stock stability||Beta < 0.9||1.09||Fail|
|Worst loss in past five years no greater than 20%||(43.5%)||Fail|
|Valuation||Normalized P/E < 18||13.88||Pass|
|Dividends||Current yield > 2%||3%||Pass|
|5-year dividend growth > 10%||14.4%||Pass|
|Streak of dividend increases >= 10 years||8 years||Fail|
|Payout ratio < 75%||31.9%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Intel last year, the company has kept its 5-point score. But the shares have done extremely well as the semiconductor giant starts staking its claim in the new technological revolution.
Few people dispute Intel's dominance over the PC industry. Although Advanced Micro Devices (NYSE: AMD ) has steadfastly competed with Intel, AMD hasn't managed to crack Intel's huge market-share advantage. And even though PC sales growth has slowed greatly in the U.S. and other developed markets, emerging-market economies still have a long way to catch up, giving Intel's processors and NVIDIA's (Nasdaq: NVDA ) graphics chips a chance to flourish in new markets for years to come. That's an opportunity that Microsoft (Nasdaq: MSFT ) hasn't been able to benefit from as much, because software is obviously easier to pirate than physical processor chips.
But mobile devices require a different sort of response from the chipmaker. So far, Intel's Ultrabook initiative appears to be geared more toward replicating Mac laptops than tablets or smartphones. Its Medfield mobile-chip line takes a bigger crack at ARM Holdings (Nasdaq: ARMH ) and its mobile chipset architecture, but Intel isn't used to working from a come-from-behind stance and could find the experience more difficult than it expects.
For retirees and other conservative investors, the key question is whether Intel will make strategic mistakes in trying to extend itself into the mobile market. If it does, those mistakes could threaten the solid income the company will generate from its legacy PC business. Success there, however, could guarantee impressive returns for shareholders for years to come.
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 -- read it today.
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