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.
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 Stryker.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$19.6 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.88||Pass|
|Worst loss in past five years no greater than 20%||(46%)||Fail|
|Valuation||Normalized P/E < 18||15.87||Pass|
|Dividends||Current yield > 2%||1.7%||Fail|
|5-year dividend growth > 10%||29%||Pass|
|Streak of dividend increases >= 10 years||19 years||Pass|
|Payout ratio < 75%||20.8%||Pass|
|Total score||7 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Stryker last year, the company has picked up a point. A 20% drop in share price over the past year has brought the medical device maker's valuation down, but the more important question is where the company goes from here.
Stryker's bread-and-butter business comes from its hip and knee replacement systems, which together make up two-thirds of its reconstructive segment's revenue. With an aging yet more active population, that field has a lot of growth potential, and Stryker is well placed to take advantage of rising demand.
But one part of Stryker's business that often goes overlooked is in the surgical equipment field, which is almost as large as the reconstructive business and has actually had faster sales growth. But while Intuitive Surgical
Another high growth area for Stryker is neurotechnology and spine products. Having bought Orthovita as well as the neurovascular division of Boston Scientific
For retirees and other conservative investors, a steadily rising dividend that's now getting close to 2% is a step in the right direction. Although Stryker will continue to see heavy competition from its peers, it's still worth a closer look for those willing to invest in a demographically favorable industry.
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 one 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, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Intuitive Surgical, MAKO Surgical, Medtronic, Zimmer Holdings, and Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of MAKO Surgical, Intuitive Surgical, Johnson & Johnson, and Stryker, as well as creating a diagonal call position in Johnson & Johnson. 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.
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