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.

It's hard to believe that how we pay for things has changed so much in a relatively short time. Yet as cash and checks have given way to the all-powerful credit and debit cards, MasterCard (NYSE: MA) has been at center stage of the huge transformation in financial transactions. With its cards nearly ubiquitous, MasterCard quietly takes a cut of billions in purchases and sales. But with electronic payments changing the landscape one more time, MasterCard has to defend its turf. Can plastic prevail? Below, we'll revisit how MasterCard 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 MasterCard.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $55.7 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 0.91 Fail
  Worst loss in past five years no greater than 20% (33.4%) Fail
Valuation Normalized P/E < 18 23.89 Fail
Dividends Current yield > 2% 0.3% Fail
  5-year dividend growth > 10% 13.4% Pass
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 4.5% Pass
  Total score   5 out of 10

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

Since we looked at MasterCard last year, the company has picked up a point. Doubling its dividend only managed to pull its yield up to a whopping 0.3%, yet shareholders probably aren't complaining about a better than 30% rise in the stock over the past year.

MasterCard has been doing a great job of finding growth despite economic troubles around the world. For instance, in its most recent quarter, MasterCard posted sales gains of 9% and a 15% jump in net profit. That put it comfortably ahead of both Discover Financial (NYSE: DFS) and American Express.

But MasterCard faces steep competition. Rival Visa (NYSE: V) has been making inroads into the mobile wallet industry, with a recent report putting Visa No. 1 and eBay's (Nasdaq: EBAY) PayPal No. 2 in consumer choice in the area.

The big news for card companies recently has been its proposed $7.25 billion settlement of alleged price-fixing and antitrust violations. The settlement would allow merchants to pass swipe fees through to their customers, but many retailers, including Home Depot (NYSE: HD), aren't certain that's the best course to follow and are opposing the settlement. What happens with the settlement could drive MasterCard's strategy going forward for years to come.

For retirees and other conservative investors, MasterCard looks extremely expensive for a stock with such a stingy dividend. With a payout ratio of less than 5%, the company seems unwilling to reward shareholders for their patience. Despite impressive share-price gains, MasterCard looks like a stock that you should wait to see pull back before considering it for your retirement portfolio.

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 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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