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 McDonald's (NYSE: MCD) 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 McDonald's.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $80.2 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 0.51 Pass
  Worst loss in past five years no greater than 20% 4%* Pass
Valuation Normalized P/E < 18 18.76 Fail
Dividends Current yield > 2% 3.2% Pass
  5-year dividend growth > 10% 27.5% Pass
  Streak of dividend increases >= 10 years 34 years Pass
  Payout ratio < 75% 47.9% Pass
  Total score   9 out of 10

Source: Capital IQ, a division of Standard & Poor's. *This figure is a gain; McDonald's did not suffer a loss during the past five years. Total score = number of passes.

With 9 points out of 10, McDonald's comes close to getting a perfect score. With most of the qualities that retirees and other conservative investors are looking for, McDonald's has delivered the goods for decades.          

The fast-food market has been anything but stable lately. After combining just a few years ago, Wendy's/Arby's (NYSE: WEN) is looking to split back up. Yum! Brands (NYSE: YUM) has been successful in its expansion into China, but second-tier restaurant brands Long John Silver's and A&W have held back its other chains, and the company is now seeking to sell them off to focus on its Taco Bell, Pizza Hut, and KFC eateries.

But McDonald's has endured throughout the decades, reinventing itself when necessary. It helped develop the highly successful Chipotle (NYSE: CMG) before spinning it off in 2006. More recently, it has taken on Starbucks (Nasdaq: SBUX) head-on with its McCafe line of beverage.

For investors, McDonald's has gotten everything right. It got through the 2008 bear market without losing a penny for shareholders, and with 34 straight years of higher dividends, the rewards have just gotten bigger as the years went by.

McDonald's has just about everything conservative investors want in a stock. If it's not already in your portfolio, you should give it a serious look.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.