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.

With thousands of stocks to choose from, many companies are household names. But among those that largely stay in the shadows, you can still find some remarkable stocks. For instance, Dover (NYSE:DOV) makes components for a wide range of industries, including energy, printing, communications technologies, and engineered systems. But what it's best known for is its 57-year track record of increasing dividends to shareholders. Below, we'll revisit how Dover 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.
  • 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 -- so long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Dover.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$11.5 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

2 years

Fail

Stock stability

Beta < 0.9

1.39

Fail

 

Worst loss in past five years no greater than 20%

(26.9%)

Fail

Valuation

Normalized P/E < 18

16.23

Pass

Dividends

Current yield > 2%

2.2%

Pass

 

5-year dividend growth > 10%

11.4%

Pass

 

Streak of dividend increases >= 10 years

57 years

Pass

 

Payout ratio < 75%

25.5%

Pass

       
 

Total score

 

7 out of 10

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

Since we looked at Dover last year, the company has held onto its seven-point score. But the stock has done reasonably well, rising about 15% over the past year.

Dover is just one of the many companies that make integral parts of products you're probably familiar with. The company even has Apple (NASDAQ:AAPL) as a customer through its Knowles Electronic subsidiary. With its fingers in products ranging from speakers and receivers to powertrain systems, Dover has the scope of a mini-conglomerate.

One particularly promising area in which Dover operates is energy, where it helps provide customized pumps and other necessary equipment for drilling activity. But with the boom in energy in recent years, Dover faces competition from SPX (NYSE:SPW), Flowserve (NYSE:FLS), and IDEX (NYSE:IEX), each of which has a slightly different focus. For instance, despite being smaller than Dover, SPX has the capacity to meet the growing demand for custom oil pipeline pumps, an important part of getting production to market.

Recently, Dover has taken a couple steps to enhance its valuation. Last month, it said it would sell off noncore operations and return $1 billion to shareholders via stock buybacks. Then, later in November, Dover bought Anthony International in a roughly $600 million deal with a private-equity firm. The maker of glass doors for refrigeration equipment will give Dover worldwide scope, as Anthony has operations in South Africa, Italy, and China.

For retirees and other conservative investors, Dover has the track record of income production that is often extremely appealing for a retirement portfolio. Although free-cash-flow growth hasn't been as consistent as many would like, Dover still makes a reasonable prospect for retirement investors.

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 owns shares of Apple. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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.