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 Wells Fargo (NYSE: WFC) 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 Wells Fargo.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $155.1 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 1.36 Fail
  Worst loss in past five years no greater than 20% (12.2%) Pass
Valuation Normalized P/E < 18 11.92 Pass
Dividends Current yield > 2% 1.6% Fail
  5-year dividend growth > 10% (23.6%) Fail
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 15.9% Pass
       
  Total score   5 out of 10

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

With five points, Wells Fargo may seem to put in only a middle-of-the-road performance. But from the viewpoint of a conservative investor, Wells Fargo held up reasonably well compared to most of its bank peers during the financial crisis, and it now appears to be firmly in recovery mode.

Wells Fargo stands out from its competitors in a number of ways. Even before the financial crisis, Wells differed from Citigroup (NYSE: C), Bank of America (NYSE: BAC), and JPMorgan Chase (NYSE: JPM) in that it tended to grow organically rather than through big mergers. It built its status as the top mortgage originator long before it took on Wachovia -- an acquisition that significantly worsened its overall asset quality.

To be fair, Wells Fargo stock did plummet during the market meltdown. But those massive losses were confined to early 2009, and by the end of that year, the stock had recovered all of its losses and then some.

Now, the company is benefiting from rising earnings, stronger capitalization, and improving credit quality. Its net interest margin -- a primary source of income for banks -- has narrowed somewhat. But even though inevitable Federal Reserve tightening will eventually exacerbate that margin compression, Wells has dealt with interest rate cycles before and should be able to position itself accordingly.

Retirees and other conservative investors might shy away from financial stocks. But with the Warren Buffett stamp of approval, Wells Fargo might be the one bank stock for which you want to make an exception.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter here. The Motley Fool owns shares of JPMorgan Chase; owns shares of and has opened a short position on Bank of America; and owns shares of and has created a ratio put spread position on Wells Fargo. 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 Fool has a disclosure policy.