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. Let's figure out what makes a great retirement-oriented stock, then examine whether 3M (NYSE: MMM) has what we're looking for.

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 3M.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $64.8 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 4 years Pass
Stock stability Beta < 0.9 0.83 Pass
  Worst loss in past five years no greater than 20% (29.8%) Fail
Valuation Normalized P/E < 18 18.36 Fail
Dividends Current yield > 2% 2.4% Pass
  5-year dividend growth > 10% 4.6% Fail
  Streak of dividend increases >= 10 years 53 years Pass
  Payout ratio < 75% 36.7% Pass
  Total score   7 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With a score of seven, 3M does a good job of giving retirees and conservative investors what they want in a stock. The stock's price hasn't been as stable in recent years as investors might hope, but its long history of steadily increasing dividends rivals the best in the market.

Most people think of Post-it Notes when someone mentions 3M, but the company is actually incredibly diverse. In addition to consumer and office supplies, 3M has a number of other segments, including health care, industrial, and security products. That makes it tough to draw comparisons among competitors, as the company doesn't just compete against office-product maker Avery Dennison (NYSE: AVY), but also other conglomerates such as Johnson & Johnson (NYSE: JNJ) in health-care products and DuPont (NYSE: DD) on the industrial side of 3M's business.

Recently, 3M has suffered from slower growth, with its most recent earnings reflecting the sluggish economy. Much of 3M's growth potential is now coming from its international operations. Already, the company has more employees overseas than in the U.S., and with recent growth rates far stronger outside the U.S. than domestically, that trend is likely to continue.

3M's shares aren't as cheap as some other large-cap bellwethers, and its dividend growth isn't as strong as investors like to see. But as a stock that gives exposure to potential global economic growth, 3M is worth digging into, especially if recent market turbulence gives you an opportunity to buy shares at a cheaper price.

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.

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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.