Being able to retire rich, or at least comfortable, is the goal of almost any investor -- but it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50-59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, $29,000 won't cut it for most people. You've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part, but choosing the right stocks can prove much more difficult.
Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:
- Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
- Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
- Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
- Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.
Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.
So how does SeaDrill stack up?
In order to check out the valuation of SeaDrill
What about SeaDrill's dividend? The company pays a tremendous and above-average 7.1% yield.
Furthermore, we want to ensure that SeaDrill's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past five years, we can't properly compute SeaDrill's growth rate because it had negative earnings in 2005. However, SeaDrill has been able to grow its earnings over the past three years, which seems pretty significant, considering the market's recent turmoil. Of course, this doesn't mean that growth will continue, but it's a great sign that the company can prosper in the face of difficulty.
One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that SeaDrill will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, SeaDrill has a beta of 0.748, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, SeaDrill fits the bill.
Let's look at the competition
We've taken a look at SeaDrill, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it to understand that particular company. Here are SeaDrill's stats when compared to three of its closest competitors:
5-Year Net Income CAGR
Source: Capital IQ, a division of Standard & Poor's. N/A = not applicable.
Each company has traits to like or dislike. Either way, it's beneficial to look at the industry picture, rather than studying SeaDrill in isolation.
Of course, I can't decide for you whether or not this is the best stock for retirement, but it has passed three of the four tests, which is pretty impressive. That doesn't necessarily mean this stock is a slam dunk, but SeaDrill has shown its ability to reward shareholders -- which means it could have a place in your portfolio.
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Jordan DiPietro owns shares of Noble. The Fool owns shares of Wells Fargo. The Fool owns shares of Ensco, Noble, and Transocean. 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.