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 Verizon
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 Verizon.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $103 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 | 0.64 | Pass |
| Worst loss in past five years no greater than 20% | (18.1%) | Pass | |
| Valuation | Normalized P/E < 18 | 13.19 | Pass |
| Dividends | Current yield > 2% | 5.4% | Pass |
| 5-year dividend growth > 10% | 3.5% | Fail | |
| Streak of dividend increases >= 10 years | 6 years | Fail | |
| Payout ratio < 75% | 212.3% | Fail | |
| Total score | 7 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With a score of 7, Verizon gives conservative investors a lot of what they might seek in a stock to help them save for retirement. Its dividend history doesn't stack up as well as some other stocks, but its cheap valuation and prospects for future growth make it worth a second look.
Verizon has a long history in the telecom industry, with roots going back to the former Bell Atlantic split-off from the breakup of the former AT&T
The biggest challenge Verizon faces in the eyes of conservative investors is maintaining its dividend. The company has a good yield, but it hasn't grown its payout as much as AT&T or rural telecom company CenturyLink
Verizon is a solid stock, but it's not the stalwart it used to be as part of Ma Bell's empire. Higher growth potential is good for aggressive investors, but retirees need to make sure that they understand the possible downsides involved before investing in the stock for their core low-risk portfolios.
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.
