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 Novartis (NYSE: NVS) 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 Novartis.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $131 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 0.25 Pass
  Worst loss in past five years no greater than 20% (6.9%) Pass
Valuation Normalized P/E < 18 16.11 Pass
Dividends Current yield > 2% 4.2% Pass
  5-year dividend growth > 10% 18.2% Pass
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 45.8% Pass
       
  Total score   9 out of 10

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

With nine points out of 10 on our scale, Novartis has everything a retirement investor would want, save a long history of dividend growth. Moreover, it's poised to maintain that stability even in an industry plagued with constant uncertainty about the future.

For most major drug companies, including Merck (NYSE: MRK), Abbott Labs (NYSE: ABT), and Pfizer (NYSE: PFE), maintaining a strong pipeline of new drugs in development is absolutely essential to their future. Yet as major blockbuster drugs like Lipitor and Zyprexa approach their patent expirations, those companies must deal with the huge impact their loss will have on sales. Many pharma companies have made big acquisitions lately to shore up their pipelines.

Novartis, however, has a unique vantage point. It develops new drugs of its own, but it also has a major presence in the generic drug market through its Sandoz division. That allows it to benefit from the same trends that have boosted the prospects of generic makers Teva Pharmaceutical (Nasdaq: TEVA) and Mylan (Nasdaq: MYL), while also retaining the big-revenue, high-margin potential of a knockout proprietary drug.

No matter what happens to the economy, people around the world will continue to need drug treatment, which gives conservative investors some protection against a future reversal of the global recovery. For retirees and others seeking to add health-care stocks to their portfolios, Novartis looks like a worthy representative to consider.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Novartis is a Motley Fool Global Gains selection. Pfizer is a Motley Fool Inside Value selection. The Fool owns shares of Abbott Laboratories and Teva Pharmaceutical. Motley Fool Alpha owns shares of Abbott Laboratories. 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.