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 Pfizer (NYSE: PFE) 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 Pfizer.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $152 billion Pass
Consistency Revenue growth > 0% in at least four of past five years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.71 Pass
  Worst loss in past five years no greater than 20% (17%) Pass
Valuation Normalized P/E < 18 14.13 Pass
Dividends Current yield > 2% 4.2% Pass
  5-year dividend growth > 10% (1.1%) Fail
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 70.7% Pass
       
  Total score   7 out of 10

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

Pfizer scores a respectable seven points. The company has let down investors on the dividend front over the past few years, but apart from that, it's been a solid performer with good prospects for the future.

With internal growth slowing, Pfizer has had to turn to acquisitions to keep its pipeline healthy. Its monster acquisition of Wyeth in 2009 marked the beginning of major consolidation in the industry, with Merck (NYSE: MRK) answering later in the year with its buyout of Schering-Plough. Yet that acquisition also forced Pfizer to cut its dividend, which has only recently started moving back up. That ended a 41-year streak of higher dividends and makes Johnson & Johnson (NYSE: JNJ) and Abbott Labs (NYSE: ABT), whose streaks are still alive and payout ratios lower, look relatively attractive by comparison.

Pfizer also faces the challenge of maintaining its pipeline. With the coming loss of patent protection on major drugs, Pfizer needs both success in drug development as well as continuing acquisitions. Its planned buyout of King Pharmaceutical (NYSE: KG) is a step in that direction, but given how big Pfizer is, it will take many similar pick-ups to keep the pace.

Despite concerns, Pfizer has done well for investors, limiting losses in the recent bear market and remaining committed to a dividend. Over the long haul, the stock should make a useful addition for retirees and other conservative investors.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Pfizer is a Motley Fool Inside Value choice. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is also a Motley Fool Income Investor pick. The Fool owns shares of Johnson & Johnson. Motley Fool Alpha owns shares of Abbott Laboratories and Johnson & Johnson. 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.