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 Gilead Sciences (Nasdaq: GILD) 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 Gilead Sciences.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $33.0 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 0.39 Pass
  Worst loss in past five years no greater than 20% (16.2%) Pass
Valuation Normalized P/E < 18 14.86 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% 0% Pass
  Total score   7 out of 9

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

With a score of 7, Gilead Sciences has a lot of what conservative investors like to see from a stock. Gilead doesn't pay a dividend, but its consistent growth and stable stock price make the company a promising place to consider new investment.

Gilead has focused on treating HIV and has a strong network of treatments in its arsenal. But the problem is that many of them rely on partnerships with other companies. For instance, its Atripla cocktail includes a drug from Bristol-Myers Squibb (NYSE: BMY), and the company is seeking approval for a new combination with a Johnson & Johnson (NYSE: JNJ) drug. That's why Gilead is developing a new quad pill. It has done well in trials and would allow Gilead to keep all its revenue from the new combination.

Recently, though, Gilead's profits have disappointed. Because fears of a flu pandemic have largely faded into the background, sales of Tamiflu have declined sharply. And increased R&D costs are hurting the bottom line.

For the longer term, the drugmaker is taking steps to broaden its scope. It recently announced a research partnership with Yale to try to develop cancer drugs. As competitors like Pfizer (NYSE: PFE) and sanofi-aventis (NYSE: SNY) have been re-establishing ties to major research universities to try to bolster their pipelines, Gilead's landing Yale is a big win for the company.

Gilead has many of the same risks as other pharmaceutical stocks seeking new drugs to replace old success stories . But with the company taking steps to shore up its future, retirees and other conservative investors can have some confidence in Gilead's prospects going forward.

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.