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 Baxter International (NYSE: BAX) 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 Baxter International.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $30.4 billion Pass
Consistency Revenue growth > 0% in at least four of past five 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 0.52 Pass
  Worst loss in past five years no greater than 20% (11.6%) Pass
Valuation Normalized P/E < 18 18.24 Fail
Dividends Current yield > 2% 2.3% Pass
  5-year dividend growth > 10% 15.2% Pass
  Streak of dividend increases >= 10 years 5 years Fail
  Payout ratio < 75% 48.5% Pass
  Total score   7 out of 10

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

Baxter achieves a strong score of 7. The company faced some minor cash flow bumps early in the recession, but growth is back, and Baxter looks poised to be a stable stalwart for conservative investors in the years ahead.

Baxter specializes in therapies that treat blood-related disorders such as hemophilia, as well as drug-delivery systems and dialysis treatment. The company once had a promising cardiovascular business, but Baxter spun off that business into Edwards Lifesciences (NYSE: EW) back in 2000. Edwards stock has outperformed Baxter's over that time frame, but both have outperformed the overall market.

We've taken a look at several other health-care companies, and where Baxter falls short is in valuation and dividend history. Both Medtronic (NYSE: MDT) and Johnson & Johnson (NYSE: JNJ) have much longer streaks of raising dividends while also trading at less expensive earnings multiples. Baxter has paid consistent dividends but only started raising them annually in 2007.

With other strong health-care stocks for a conservative portfolio, retirees may want to look beyond Baxter. But if you're looking for deep diversification among your stock holdings, Baxter could make a good bench player along with the stronger plays in the industry.

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 Baxter International 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. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Inside Value and Motley Fool Income Investor pick. The Fool owns shares of Johnson & Johnson and Medtronic. Motley Fool Alpha LLC owns shares of 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.