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 Deere (NYSE: DE) 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 Deere.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $36.1 billion Pass
Consistency Revenue growth > 0% in at least four of past five 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 1.52 Fail
  Worst loss in past five years no greater than 20% (58.1%) Fail
Valuation Normalized P/E < 18 15.45 Pass
Dividends Current yield > 2% 1.9% Fail
  5-year dividend growth > 10% 13.2% Pass
  Streak of dividend increases >= 10 years 8 years Fail
  Payout ratio < 75% 20.9% 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, Deere doesn't have everything that conservative investors are looking for in a stock. With its exposure to the cyclical commodity space, the stock bounces up and down sharply.

As a maker of farm equipment, Deere may not sound like all that exciting of a company. But Deere is at the crossroads of some strong trends that should continue for a while. On one hand, growth in emerging markets like China has raised standards of living, increasing demand for food which in turn has caused food prices to rise. Both Deere and peer Caterpillar (NYSE: CAT) have benefited from that trend, as have fertilizer sellers PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS) as farmers pull out all the stops to increase crop yields.

At the same time, though, farm profits are notoriously volatile. Along with higher revenue, farmers have to pay more for fuel, eating into profits. If food prices fall before energy prices, then the agricultural sector could get squeezed again. Despite the upward pressure that ethanol producers like Pacific Ethanol (Nasdaq: PEIX) and Archers-Daniels-Midland (NYSE: ADM) put on corn prices, companies like Deere that rely on farmers having spare cash for equipment could get squeezed right along with farmers.

Those factors explain the tug-of-war that Deere shareholders face. That may give the stock a bumpier ride than retirees and other conservative investors want to deal with, but with a steadily rising dividend and plenty of room for further increases, Deere may nevertheless be worth a second look.

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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