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 Microsoft (Nasdaq: MSFT) 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 Microsoft.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $235 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 1.07 Fail
  Worst loss in past five years no greater than 20% (44.4%) Fail
Valuation Normalized P/E < 18 14.4 Pass
Dividends Current yield > 2% 2.3% Pass
  5-year dividend growth > 10% 7.2% Fail
  Streak of dividend increases >= 10 years 5 years Fail
  Payout ratio < 75% 23.1% Pass
       
  Total score   5 out of 10

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

Microsoft has a reputation for being more of a growth stock than a conservative pick for retirees. But as the business has matured, growth is harder to come by, and with many retirees owning long-held shares of Microsoft with big capital gains, tax considerations play a role in wanting to hang onto them.

Microsoft dominates the PC operating system and office-based software niches with its Windows and Office products. But many see that dominance eroding over time as people move away from PCs and toward mobile devices, where Microsoft has a much weaker presence. With Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) leading the charge toward tablets and smartphones, Microsoft has largely been left behind.

That's not a fatal flaw for conservative investors, though. The key is how long Microsoft's cash-cow businesses will last, and whether the current stock price makes shares a bargain despite the possibility of a decline in those core offerings.

Moreover, Microsoft isn't completely without growth prospects. The company has moved into virtualization and also made a recent splash with its Kinect motion-sensor for its Xbox gaming system, which put Sony (NYSE: SNE) on the ropes with its uninspired competing Move controller.

With a score of just 5 out of 10 , Microsoft has enough risks to put it out of the top tier of retirement-ready stocks. It's not a terrible holding by any means, but if you keep looking, you can almost certainly do better.

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.

Add Microsoft to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Google and Microsoft are Motley Fool Inside Value choices. Google is a Motley Fool Rule Breakers selection. The Fool has written puts on Apple, which is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. 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.