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.

Retirement investors have largely ignored gold stocks as being too speculative and volatile. But because of the strong performance of gold in recent years, especially during the periods in which the overall stock market struggled, gold stocks have earned a closer look. Royal Gold (NASDAQ:RGLD) has many of the characteristics that conservative investors like to see, but in a tough environment for gold-related investments, can the company stay on top? Below, we'll revisit how Royal Gold 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 Royal Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$5.6 billion

Fail

Consistency

Revenue growth > 0% in at least four of past five 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

0.40

Pass

 

Worst loss in past five years no greater than 20%

(14.4%)

Pass

Valuation

Normalized P/E < 18

55.22

Fail

Dividends

Current yield > 2%

0.7%

Fail

 

5-year dividend growth > 10%

18.2%

Pass

 

Streak of dividend increases >= 10 years

11 years

Pass

 

Payout ratio < 75%

31.9%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Royal Gold last year, the company has kept its six-point score. The stock has done even better, rising 30% and showing the benefits of the company's unusual business model.

Royal Gold is a streaming company, which means that it doesn't own any gold mines or produce any of the yellow metal on its own. Instead, it enters into contracts with gold mining companies, providing financing in exchange for the right to buy certain amounts of gold production at specified prices per ounce that are typically well below current market prices. Just as Silver Wheaton (NYSE:SLW) does with silver streaming, Royal Gold gets much of the upside from its clients' mines without the operational hassles that mining companies have to face.

Royal Gold has a very promising stable of customers, with interests in Barrick Gold's (NYSE:ABX) Pascua-Lama mine, Goldcorp's (NYSE:GG) Penasquito mine, and the Mt. Milligan project of Thompson Creek Metals (NYSE:TC). Yet those projects have faced some challenges, with Mt. Milligan's costs proving to be higher than expected and Penasquito running into production problems from lack of water. Royal Gold may not have to deal with the immediate fallout from problems, but its revenue depends on the mines producing gold, and anything that jeopardizes or delays production could be bad news for investors.

For retirees and other conservative investors, strong growth and rising dividends are marks in Royal Gold's favor. At current prices, though, the stock seems fully valued, and it would take further upside in gold prices to justify these multiples for very long.

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.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.