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 ACE Limited (NYSE: ACE) 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 ACE Limited.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $22.2 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 2 years Fail
Stock stability Beta < 0.9 0.70 Pass
  Worst loss in past five years no greater than 20% (13%) Pass
Valuation Normalized P/E < 18 9.79 Pass
Dividends Current yield > 2% 2.1% Pass
  5-year dividend growth > 10% 7.6% Fail
  Streak of dividend increases >= 10 years 17 years Pass
  Payout ratio < 75% 14% Pass
       
  Total score   8 out of 10

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

With eight points, ACE Limited has just about everything you'd like to see in a conservative stock. The insurance company isn't a household name among U.S. consumers, but it has built a lucrative business that has produced rising payouts for shareholders for years.

ACE Limited writes several different kinds of insurance for its customers. It provides property, casualty, and liability coverage; sells life insurance and related products; and also provides reinsurance to other insurance companies for catastrophic coverage.

Reinsurance has come into focus lately with several major losses around the world, most recently in Japan. Early estimates of ACE's costs from the Japanese earthquake are in the $200 million to $250 million range, well below the $700 million that AIG's (NYSE: AIG) Chartis unit is projecting, but quite a bit more than Montpelier Re's (NYSE: MRH) $126 million or the $139 million projected from Validus (NYSE: VR).

For longer-term investors, though, losses from catastrophic events are par for the course. The question is how the company responds going forward, and at least historically, ACE has managed to thrive with modest yet consistent growth while keeping dividends on the rise over time.

As AIG's experience during the financial crisis shows, insurance definitely isn't without risk for investors. But ACE has done a good job of managing that risk, and so retirees and other conservative investors should feel comfortable taking a look at the company as a possible addition to retirement 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.

Add ACE Limited 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. Montpelier Re Holdings is a Motley Fool Stock Advisor selection and a Motley Fool Hidden Gems pick. 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.