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 Raytheon (NYSE: RTN) 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 Raytheon.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $18.1 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 3 years Fail
Stock stability Beta < 0.9 0.67 Pass
  Worst loss in past five years no greater than 20% (14.2%) Pass
Valuation Normalized P/E < 18 12.14 Pass
Dividends Current yield > 2% 3% Pass
  5-year dividend growth > 10% 11.3% Pass
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 29.1% Pass
  Total score   8 out of 10

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

Raytheon defends its record well with an eight-point showing. Many investors perceive a major threat for the defense contractor in the years ahead, but at least for now, the company is giving conservative investors almost everything they want in a stock.

Defense stocks have been under fire for quite a while, as high government spending has led to talk of how to bring budget deficits under control. Despite evidence to the contrary from the Department of Defense itself, many investors expect cuts to defense spending in the near future, and as a result, they've pressured shares of Raytheon, as well as peers Northrop Grumman (NYSE: NOC) and General Dynamics (NYSE: GD), to low-enough levels to attract bargain-seeking value investors.

With the whole industry offering attractive valuations, one big challenge is picking a particular stock. For those seeking more diversified companies, United Technologies (NYSE: UTX) and Boeing (NYSE: BA) have exposure both to defense as well as civilian applications. But if you prefer a pure play on defense, then you need another way to choose. Fellow Fool Matt Koppenheffer picked Raytheon out of the crowd based on its particular mix of businesses, which leans toward information and surveillance systems that will always be in demand both in peacetime and at war.

Raytheon has its risks. But if you're retired or have a conservative investment philosophy, the value you're getting on the stock and its solid history of good business performance make Raytheon a stock you should definitely watch.

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.

Add Raytheon to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

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 Raytheon, General Dynamics, 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.