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 Walgreen (NYSE: WAG) 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 Walgreen.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $39.5 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 4 years Pass
Stock stability Beta < 0.9 0.99 Fail
  Worst loss in past five years no greater than 20% (34.4%) Fail
Valuation Normalized P/E < 18 17.54 Pass
Dividends Current yield > 2% 1.6% Fail
  5-year dividend growth > 10% 21.8% Pass
  Streak of dividend increases >= 10 years 35 years Pass
  Payout ratio < 75% 26.5% Pass
  Total score   7 out of 10

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

With seven points, Walgreen has the right prescription for many conservative investors. The drugstore chain has a long history of rewarding shareholders with ever-increasing dividends and has overcome adversity where some of its competitors have struggled.

Walgreen is the largest U.S. retail drugstore chain. But the company does more than just fill prescriptions. In fact, one of its advantages over competitor Rite Aid (NYSE: RAD) has been its ability to sell groceries and other products unrelated to its core pharmacy business. In its most recent quarter, that helped Walgreen post big jumps in overall revenue and same-store sales, leaving Rite Aid in the dust.

But Walgreen has more to worry about than just Rite Aid and archrival CVS Caremark (NYSE: CVS). Pharmaceutical distributors like Cardinal Health (NYSE: CAH), AmerisourceBergen (NYSE: ABC), and McKesson (NYSE: MCK) work directly with small independent pharmacies, using their clout to help them compete in situations in which Walgreen would otherwise have huge advantages from economies of scale and increased bargaining power.

To that end, the company recent announced a buyout of online drug seller (Nasdaq: DSCM). The move signals a possible expanded role for the Internet in its business.

Despite a lower dividend yield than retirees would like to see and some choppiness in its stock price, Walgreen has raised its payout for 35 straight years and has the growth to support continued increases in the future. Even with some uncertainty over health-care related stocks, Walgreen is worth a closer look for those looking to add solid income-producers to their 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.

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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.