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 United Technologies (NYSE: UTX) 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 United Technologies.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $72.2 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 4 years Pass
Stock stability Beta < 0.9 1.01 Fail
  Worst loss in past five years no greater than 20% (28.5%) Fail
Valuation Normalized P/E < 18 16.06 Pass
Dividends Current yield > 2% 2.1% Pass
  5-year dividend growth > 10% 14.1% Pass
  Streak of dividend increases >= 10 years 17 years Pass
  Payout ratio < 75% 33.9% Pass
       
  Total score   8 out of 10

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

United Technologies racks up eight points, giving retirees and conservative investors just about everything they'd like to see in a stock. With the only marks against it related to its stock volatility in recent years, shareholders have to be pleased with the combination of good value and healthy dividend behavior that United Technologies has given them over the years.

In looking at United Technologies, most people focus on its role in the defense industry. But the company has other aspects as well, including heating and cooling systems, elevators, and fire and security systems. As such, the company has exposure not just to defense but to overall construction activity, as well.

Of course, in recent years, neither of those areas has been particularly strong. Housing and commercial construction suffered during the recession. And fears of defense budget cuts from the federal government have thrown competitors Northrop Grumman (NYSE: NOC), General Dynamics (NYSE: GD), and Lockheed Martin (NYSE: LMT) for big loops, as each of them trades at highly discounted earnings multiples and has seen flat stock performance over the past year.

United Technologies, however, has seen its shares rise by double-digit percentages since early 2010, supporting a higher valuation. That may not sound good to value investors, but it speaks to the premium of having a diversified company. As the civilian economy rebounds, United Technologies should see bigger gains than its pure-defense peers -- exactly the behavior that conservative retirees want to see in a long-term holding.

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. The Fool owns shares of General Dynamics, Lockheed Martin, and Northrop Grumman. 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.