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.

Fastenal (NASDAQ:FAST) is a key player in business-to-business commerce, selling industrial and construction supplies both to other businesses at the wholesale level as well as direct to consumers at the retail level. Yet with the economy on treacherous footing, Fastenal's customers aren't all in the best of shape. Can Fastenal overcome economic headwinds to prosper? Below, we'll revisit how Fastenal 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 Fastenal.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$12.6 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

0.95

Fail

 

Worst loss in past five years no greater than 20%

(12.1%)

Pass

Valuation

Normalized P/E < 18

30.84

Fail

Dividends

Current yield > 2%

1.7%

Fail

 

5-year dividend growth > 10%

24.9%

Pass

 

Streak of dividend increases >= 10 years

13 years

Pass

 

Payout ratio < 75%

48.4%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Fastenal last year, the company has kept its six-point score. The stock has put in a similarly lukewarm performance, rising about 10% over the past year in line with the overall market.

Fastenal has come up with innovative ways to serve its industrial and construction industry customers. In addition to traditional stores, Fastenal has put specialized vending machines in the workplaces of some of its customers, offering everything from metal cutters to first-aid kits. At the end of last year, the company had 7,500 machines installed, making it less necessarily to open full stores to serve customers and giving it a competitive advantage over rival W.W. Grainger (NYSE:GWW). Partnerships with 3M (NYSE:MMM) and Kimberly-Clark (NYSE:KMB), among others, have also helped keep Fastenal's revenue higher.

But Fastenal has pushed expectations so high that even minor misses can hurt. For instance, in June, the shares fell 10% even after the company announced a jump of 18.4% in monthly sales. Yet in its third quarter, Fastenal posted a 10% increase in revenue compared to the year-ago period, with 73 new stores helping push net income up 13%. MSC Industrial Direct (NYSE:MSM), a competing supplier, also did well, with a recovering housing market arguably helping both stocks do better.

For retirees and other conservative investors, a track record of more than a decade of annual dividend increases is impressive, although the stock's yield is still below average. If you believe the recovery is about to pick up steam rather than fall back into recession, then Fastenal might make a reasonable pick for a retirement portfolio -- although you might prefer to wait for a better valuation.

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 owns shares of MSC Industrial Direct. Motley Fool newsletter services recommend Kimberly-Clark, 3M, and MSC Industrial Direct. 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.