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.

Procter & Gamble (NYSE: PG) is one of the strongest consumer-oriented companies on the planet, with 24 different name brands sporting annual sales of $1 billion or more. With its products so familiar to so many, the stock has given wary investors a strong defense against bear markets, with much more modest downswings even during 2008's market meltdown. Can the stock keep delivering great returns to investors? Below, we'll revisit how Procter & Gamble does on our 10-point scale.

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 Procter & Gamble.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $178 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 2 years Fail
Stock stability Beta < 0.9 0.43 Pass
  Worst loss in past five years no greater than 20% (13.8%) Pass
Valuation Normalized P/E < 18 20.44 Fail
Dividends Current yield > 2% 3.3% Pass
  5-year dividend growth > 10% 11.2% Pass
  Streak of dividend increases >= 10 years 55 years Pass
  Payout ratio < 75% 58.9% Pass
  Total score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Procter & Gamble last year, the company has kept its eight-point score. For the most part, things look pretty similar from a numbers perspective to how they appeared in early 2011, but the company still faces some challenges.

Having just looked at P&G from an overall perspective last week, let's focus in on the company's international business. The company has a presence in 180 different countries, helping to broaden its revenue beyond the reach of any local economy.

That's a strategy that has worked well lately for many consumer-oriented companies. Philip Morris International (NYSE: PM) had weakness in Europe and Latin America, but strength in Asia offset those declines. Similarly, Yum! Brands (NYSE: YUM) has suffered from slowness in the U.S. for quite a while, but its big presence in China makes the restaurant chain a growth leader. The strategy has been even more crucial for European-based companies Telefonica (NYSE: TEF) and Banco Santander (NYSE: STD), whose connections to Latin America have helped give beaten-down shares a little more buoyancy than they'd otherwise have.

Closer to its own industry, P&G has a far greater reach than most of its competitors. While Clorox collects about 20% of revenue internationally and Colgate takes in less than 20% outside North America, P&G raised its share of sales outside the U.S. to 63% in 2011. That leaves P&G more vulnerable to currency fluctuations, but it also benefits more from international economic strength.

For retirees and other conservative investors, a solid dividend track record combined with international growth potential is just about the perfect combination right now. P&G still deserves a place in the retirement portfolios of most investors saving for their golden years.

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.

If you really want to retire rich, no single stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, and it also reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

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