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 Chubb (NYSE: CB) 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 Chubb.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $17.9 billion Pass
Consistency Revenue growth > 0% in at least four of past five years 2 years Fail
  Free cash flow growth > 0% in at least four of past five years 0 years Fail
Stock stability Beta < 0.9 0.48 Pass
  Worst loss in past five years no greater than 20% (4.1%) Pass
Valuation Normalized P/E < 18 10.52 Pass
Dividends Current yield > 2% 2.6% Pass
  5-year dividend growth > 10% 11.5% Pass
  Streak of dividend increases >= 10 years 47 years Pass
  Payout ratio < 75% 21.7% Pass
  Total score   8 out of 10

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

With a score of 8, Chubb gives conservative investors almost everything they'd want to see in a stock. Despite some troubling trends in falling free cash flow and revenue growth, the insurance company has a long history of regularly raising dividends and trades at a reasonable valuation right now.

Chubb has been dealing with a tough environment for property and casualty insurers lately. Big natural disasters last year led to earnings shortfalls not just for Chubb but also for competitors Allstate (NYSE: ALL) and Travelers (NYSE: TRV). Even worse, those results don't include the impact of the Japanese earthquake, to which some analysts believe Chubb has substantial exposure, along with Berkshire Hathaway (NYSE: BRK-B) and AIG (NYSE: AIG).

Nevertheless, the hallmark of successful insurance companies is that over the long run, they manage to smooth out the impact of big losses and recoup them by raising premiums during less turbulent times. Chubb's success in doing so has helped it raise its dividends regularly for 47 consecutive years, despite having endured many past periods with catastrophic events.

Insurance can be a dangerous business, but over the years, Chubb has shown that it has what it takes to play in the space. Retirees and other conservative investors can feel pretty confident that Chubb will overcome short-term challenges to reward shareholders in the long run.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.