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 Hudson City Bancorp (Nasdaq: HCBK) 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 Hudson City Bancorp.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $4.9 billion Fail
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 4 years Pass
Stock stability Beta < 0.9 0.61 Pass
  Worst loss in past five years no greater than 20% (10.0%) Pass
Valuation Normalized P/E < 18 8.24 Pass
Dividends Current yield > 2% 3.4% Pass
  5-year dividend growth > 10% 16.4% Pass
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 56.0% Pass
  Total score   8 out of 10

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

Hudson City Bancorp scores eight points, showing that it succeeded in delivering what conservative investors want from a stock when many other bank stocks failed. But recent moves show that tough times have finally caught up with the bank.

One reason why I haven't looked at many bank stocks in this series is that they almost all fare badly on the measures that retiree investors like to see. Megabanks Bank of America (NYSE: BAC), JPMorgan Chase (NYSE: JPM), and Citigroup (NYSE: C) all slashed their dividends and suffered huge losses during the market meltdown. Even many smaller banks, such as KeyCorp (NYSE: KEY) and SunTrust (NYSE: STI), fell prey to the need to raise capital at the expense of shareholder payouts. Yet throughout the downturn, Hudson capitalized on favorable rate spreads, acting like a beacon in the night to prove that not all banks were leveraged to the hilt and vulnerable to the crisis.

But the lingering effects of the weak economy finally caught up to Hudson. Recently, the company posted its first quarterly net loss since going public, largely due to restructuring charges. Yet with provisions for loan losses improving and tier 1 capital on the rise, the move may be a one-time hit for the bank.

Banks have scared retirement investors silly in recent years. But for those looking to add some financial exposure to your portfolio, Hudson has a lot to offer. With a yield above 3% -- even after its recent cut -- the stock is worth a closer look.

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 Hudson City Bancorp 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've got 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. The Fool owns shares of Bank of America and JPMorgan Chase, and through a separate account in its Rising Star portfolios also has a short position on Bank of America. We Fools may not 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.