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 ExxonMobil (NYSE: XOM) 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 ExxonMobil:


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $407 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 3 years Fail
Stock stability Beta < 0.9 0.68 Pass
  Worst loss in past five years no greater than 20% (13.1%) Pass
Valuation Normalized P/E < 18 13.2 Pass
Dividends Current yield > 2% 2.2% Pass
  5-year dividend growth > 10% 8.8% Fail
  Streak of dividend increases >= 10 years 28 years Pass
  Payout ratio < 75% 30.4% Pass
  Total score   8 out of 10

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

As the stock with the world's biggest market cap, ExxonMobil holds a lot of appeal to safety-seeking retirees. And with a score of 8 out of 10, the oil giant rates pretty well in giving investors the stability, value, and dividend strength they're looking for.

Of course, when it comes to solid energy stocks, ExxonMobil isn't the only game in town. ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX) aren't quite as big as ExxonMobil, but they both have more attractive dividend yields, while trading at cheaper valuations. But ConocoPhillips suffered nearly a 40% loss in 2008, which no retiree on a fixed income would enjoy.

On the other hand, don't deceive yourself into considering ExxonMobil invulnerable. Many would have thought the same of BP (NYSE: BP) before the Gulf disaster. BP had to cut its dividend, putting retirees who counted on it in a bind.

Nevertheless, with a Dividend Aristocrat's history of stable, growing dividends, ExxonMobil is a great choice for a retiree looking for a solid stock. It isn't flashy, but barring a BP-like calamity, ExxonMobil should get the job done.

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.