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 JPMorgan Chase.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$141 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||1.32||Fail|
|Worst loss in past five years no greater than 20%||(25.1%)||Fail|
|Valuation||Normalized P/E < 18||7.73||Pass|
|Dividends||Current yield > 2%||3.2%||Pass|
|5-year dividend growth > 10%||(4.7%)||Fail|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||27.7%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at JPMorgan Chase last year, the company has lost a point. Falling revenue last year was the culprit, but the stock did manage to eke out a 5% gain over the past year.
Four years on from the financial crisis, big U.S. banks are still going through their share of controversies. For JPMorgan, the big news recently came from multibillion-dollar losses from a bad trade in the derivatives market. Although investors have largely put the episode behind them, it proves that JPMorgan is still vulnerable to internal problems.
Another problem may take longer to resolve. Along with Bank of America
For the most part, though, JPMorgan is doing better than most of its peers. It has raised its dividend substantially for two consecutive years, and it passed the Fed's recent stress tests with no problems. With the possible exception of Wells Fargo
For retirees and other conservative investors, though, slowing growth is alarming. Although the stock pays a nice dividend, it's still uncertain whether banks will ever return to the leverage-based business models that earned strong profits during the mid-2000s. Prudent investors may prefer to wait before committing money to JPMorgan in their retirement portfolios.
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.
Meanwhile, even if Bank of America isn't quite as solid as JPMorgan, it may have higher upside potential. Read all about it in our premium investment report on Bank of America today.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Citigroup, Wells Fargo, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Wells Fargo and formerly recommended JPMorgan Chase. 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.