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.
Utilities have always been favorites among conservative investors looking for solid dividend income and not too much volatility. With its roots in the greater New York metropolitan area, Consolidated Edison (NYSE: ED ) has a highly concentrated customer base that provides predictable income flows and dependable demand. Yet although the company has likely benefited from low natural gas prices, how long can those good times last? Below, we'll revisit how Consolidated Edison 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 Consolidated Edison.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$17.1 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||4 years||Pass|
|Stock stability||Beta < 0.9||0.24||Pass|
|Worst loss in past five years no greater than 20%||(15.7%)||Pass|
|Valuation||Normalized P/E < 18||16.61||Pass|
|Dividends||Current yield > 2%||4.2%||Pass|
|5-year dividend growth > 10%||0.9%||Fail|
|Streak of dividend increases >= 10 years||38 years||Pass|
|Payout ratio < 75%||65.9%||Pass|
|Total score||8 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Consolidated Edison last year, the company has kept its eight-point score. The utility's run of dividend increases continues unabated, but the pace of that growth is extremely weak, and revenue actually fell slightly last year.
Even with all the topsy-turvy markets we've seen in the past several years, utilities have given investors a smooth ride. Along with fellow utilities Progress Energy (NYSE: PGN ) and SCANA (NYSE: SCG ) , ConEd was one of the least volatile stocks in the S&P 500 over the past 10 years. Combined with average annual returns of nearly 9% over that span, ConEd has been a great find for conservative investors.
But some investors are growing concerned that ConEd's shares have come too far and that its yield has dropped too low. Fool contributor Morgan Housel singled out the stock as showing that the market is in a dividend bubble, as ConEd hasn't had a yield this low in more than a decade. With 20% gains two years in a row, the stock looks due for a correction. Analysts recently agreed, downgrading ConEd along with peers Southern Company (NYSE: SO ) and Dominion Resources (NYSE: D ) based largely on high valuations that are nearly all-pervasive in the industry.
Back in January, ConEd beat analyst expectations on earnings, but revenue fell. That's not necessarily indicative of a trend, but it does give you a sense of ConEd's business sensitivity to changing conditions.
For retirees and other conservative investors, ConEd's high valuation and relatively low dividend yield compared to historical values raises some concerns. At this point, waiting for a more attractive price point may be the best way to play a decision to add ConEd's stock to your retirement portfolio.
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.
Add Consolidated Edison to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.