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 and then examine whether CVS Caremark (NYSE: CVS) 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 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 CVS Caremark.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $49.9 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 3 years Fail
Stock stability Beta < 0.9 0.80 Pass
  Worst loss in past five years no greater than 20% (27.2%) Fail
Valuation Normalized P/E < 18 14.29 Pass
Dividends Current yield > 2% 1.4% Fail
  5-year dividend growth > 10% 19.3% Pass
  Streak of dividend increases >= 10 years 8 years Fail
  Payout ratio < 75% 14.0% Pass
       
  Total score   6 out of 10

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

With 6 points, CVS Caremark has some of what conservative investors want from a stock, but it's also missing some important characteristics. The downsides of a fairly low dividend yield and some volatility in recent years are partially offset by strong recent dividend growth, as well as an attractive valuation.

CVS Caremark has two businesses in one. On one hand, most people know it as a drugstore chain that rivals Walgreen (NYSE: WAG) and Rite Aid (NYSE: RAD) for dominance. On the other hand, CVS also has a thriving pharmacy benefits management business, in which it competes with MedcoHealth (NYSE: MHS) and McKesson (NYSE: MCK) to provide services for businesses seeking to control their medical-benefit costs.

Despite some short-term bumps in the road related to the recession, long-term investors can feel comfortable that CVS's combination of businesses gives it good prospects for the future. With an aging population, demand for health-care services will only rise over time. And with the federal government seeking new ways to reform health care and reduce expenses for Medicare and Medicaid, the company's benefits management will probably see increased demand in the years to come -- while also insulating CVS from the retail pressures that have caused Rite Aid so much trouble.

CVS doesn't have a perfect track record for retirees and other conservative investors looking for stocks to add to their portfolios. Competition on all fronts, including from big-box retailers such as Wal-Mart, threaten its long-term success. But over the long haul, CVS should continue to do well and deserves at least some consideration.

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.

Add CVS Caremark to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you have the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. McKesson and Wal-Mart are Motley Fool Inside Value selections. McKesson and MedcoHealth are Motley Fool Stock Advisor picks. Wal-Mart is a Motley Fool Global Gains and Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of MedcoHealth and Wal-Mart. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.