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. Let's figure out what makes a great retirement-oriented stock, then examine whether Medtronic (NYSE: MDT) has what we're looking for.

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 Medtronic.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $42.4 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 0.88 Pass
  Worst loss in past five years no greater than 20% (36.3%) Fail
Valuation Normalized P/E < 18 15.65 Pass
Dividends Current yield > 2% 2.3% Pass
  5-year dividend growth > 10% 17.8% Pass
  Streak of dividend increases >= 10 years 32 years Pass
  Payout ratio < 75% 29.1% Pass
  Total score   9 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Medtronic scores nine points out of 10, showing that it has most of what conservative investors want for their retirement portfolios. Although the stock didn't hold up well during the 2008 market meltdown, it has delivered consistent growth and lucrative dividends over the years and carries a very reasonable valuation.

Medtronic has a long history of innovation and growth, and the medical device maker is continuing that tradition. In the coming two years, the company expects to launch 60 new products. It already spends more on research and development than competitors Stryker (NYSE: SYK), Zimmer Holdings (NYSE: ZMH), and St. Jude Medical (NYSE: STJ) combined.

But the company has faced some challenges lately. The new health-care law has raised concerns throughout the industry, and the slow economy led potential patients to put off elective medical procedures, hurting the company's growth. Earlier this week, Medtronic tightened its 2011 guidance at the lower end of its previous estimate and missed revenue growth expectations, and the company plans to cut 1,500 to 2,000 jobs to cut costs. However, there were some bright spots: Emerging market sales were up 26%, suggesting a potential path for future growth.

Medtronic has dealt with difficulties before and come through largely unscathed. For retirement investors looking for a solid company with a long history of succeeding through thick and thin, Medtronic should definitely be on your watch list.

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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If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.