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 Bank of Nova Scotia (NYSE: BNS) 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 Bank of Nova Scotia.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $64.9 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 0.82 Pass
  Worst loss in past five years no greater than 20% (45%) Fail
Valuation Normalized P/E < 18 15.51 Pass
Dividends Current yield > 2% 3.6% Pass
  5-year dividend growth > 10% 7.6% Fail
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 50.5% Pass
  Total score   6 out of 10

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

With six points, Bank of Nova Scotia has some but not all of the attractive traits that conservative investors like to see in a stock. Compared to some of its American counterparts, however, Scotiabank has done a good job of getting through the financial crisis.

If you've wondered why you haven't seen many banks profiled in this series, the reason is that most of them don't perform very well on this scale. With huge amounts of share price volatility, ravaged dividends, and a lack of growth, Citigroup (NYSE: C), Bank of America (NYSE: BAC), and Fifth Third Bancorp (Nasdaq: FITB) haven't delivered the stability and performance that any investor would like, let alone a conservative one.

But Canadian banks have been a different story. Its stable banking system largely avoided the problems of the financial crisis, and the nation's resource-rich economy has benefited from high oil and mineral prices. That didn't stop Scotiabank's stock from falling substantially during the market meltdown, but it did maintain its dividend, helping its record of raising dividends in 37 of the past 40 years.

In particular, Scotiabank has a strong presence in international markets, especially Latin America. That's been a good place to be lately and should help the bank's growth prospects going forward.

With risk still of an overheating Canadian housing market, Scotiabank isn't out of the woods yet. But given how much better it has done than its U.S. counterparts, Scotiabank is worth a look 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 it will 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.