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 Vale (NYSE: VALE) 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 Vale.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $166.4 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 3 years Fail
Stock stability Beta < 0.9 0.74 Pass
  Worst loss in past five years no greater than 20% (62.4%) Fail
Valuation Normalized P/E < 18 10.31 Pass
Dividends Current yield > 2% 2.4% Pass
  5-year dividend growth > 10% 14.3% Pass
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 16.9% Pass
  Total score   7 out of 10

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

With seven points, Vale has a lot to offer conservative investors. The Brazilian miner has definitely benefited from global trends over the past decade, and its stock isn't for the faint of heart, but as a way to gain exposure to the red-hot commodities space, Vale is a reasonable choice.

Along with competitors Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP), Vale is among the largest companies in the world in producing iron ore. As Chinese demand has ramped up since the turn of the millennium, so too has Vale's status as an industry leader.

But big Brazilian companies have to keep their local government happy. Earlier this year, Vale replaced former top executive Roger Agnelli with Murilo Ferreira because of pressure from Brazil's new president. As with Brazilian energy giant Petrobras (NYSE: PBR), Vale may occasionally have to put maximizing profits second to meeting the demands of the Brazilian government.

Among its peers, Vale trades at the cheapest valuation and also is the only one to have a dividend yield of more than 2%. As its losses during the recent bear market show, Vale isn't the sort of stock you can expect to hold up in a recession. But if you believe the worst is over for the global economy, then Vale might make a worthy addition even for retirees and other conservative investors.

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.