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 Hewlett-Packard (NYSE: HPQ) 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 Hewlett-Packard.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $86.7 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 1.01 Fail
  Worst loss in past five years no greater than 20% (27.6%) Fail
Valuation Normalized P/E < 18 11.49 Pass
Dividends Current yield > 2% 1.2% Fail
  5-year dividend growth > 10% 32% Pass
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 8% Pass
  Total score   5 out of 10

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

With just five points, Hewlett-Packard doesn't have everything that conservative investors would like to see in a stock. The technology company has made some progress in overcoming the drama of the past year, but it still has a number of problems to address.

Until recently, Hewlett-Packard found itself in the difficult personal computing space, which has increasingly become a low-margin commodity business. With HP and Dell (Nasdaq: DELL) locked in a competition in which it seemed no one would emerge victorious, former top executive Mark Hurd moved the company more toward IBM's (NYSE: IBM) more successful consulting and services model.

But last year, Hewlett-Packard lost top executive Mark Hurd in the face of a scandal that ended up sending him to competitor Oracle (Nasdaq: ORCL). That has left HP struggling for direction. It's tried to respond by taking on Cisco Systems (Nasdaq: CSCO) by pushing into its networking space, as well as leveraging its Palm acquisition by putting its webOS operating system onto its tablet, smartphone, and PC offerings. Still, it's unclear exactly how HP will be able to keep up in the fast-moving tech space.

Hewlett-Packard has an amazingly cheap valuation. But until it comes through with a working strategy for the future, it probably doesn't deserve a place in portfolios for retirees and other conservative 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.

Add Hewlett-Packard to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.