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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
Investors around the world have gotten used to the idea that telecom stocks share several attractive traits, especially for conservative investors. For years, the utility-like nature of the telecom business produced strong dividends and calm stocks. But as telecom increasingly meant mobile services, the stakes have risen, making companies like America Movil
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 America Movil.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$92.2 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||0.46||Pass|
|Worst loss in past five years no greater than 20%||(50.2%)||Fail|
|Valuation||Normalized P/E < 18||15.44||Pass|
|Dividends||Current yield > 2%||1.1%||Fail|
|5-year dividend growth > 10%||29.2%||Pass|
|Streak of dividend increases >= 10 years||6 years||Fail|
|Payout ratio < 75%||19.4%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of seven, America Movil has a lot of what conservative investors like to see in a stock. As a primary holding of one of the richest people in the world, the Mexican telecom has an amazing grasp over the entire Western Hemisphere.
America Movil is a crown jewel in billionaire Carlos Slim's business empire. The company has a wireless telecom network that spans the length of North and South America, and it has focused considerable attention on the big growth opportunity in fast-growing Brazil. In the U.S., the company stands behind the pay-as-you-go TracFone business, which competes against Sprint Nextel
Yet from an investor's standpoint, America Movil is partially a victim of its own success. With very high mobile penetration rates in Mexico and Brazil, growth opportunities have begun to subside. Meanwhile, competition in emerging markets from Telefonica
For retirees and other conservative investors, however, the biggest strike against America Movil may be its meager dividend of barely 1%. Although the company has plenty of room to raise that payout going forward, you may prefer to wait and see how America Movil responds to changing competitive pressures before you commit your money.
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. The Motley Fool owns shares of Telefonica. 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.