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 Target (NYSE: TGT) 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 Target.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $35.7 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.95 Fail
  Worst loss in past five years no greater than 20% (30.0%) Fail
Valuation Normalized P/E < 18 13.44 Pass
Dividends Current yield > 2% 1.9% Fail
  5-year dividend growth > 10% 19.3% Pass
  Streak of dividend increases >= 10 years 43 years Pass
  Payout ratio < 75% 20.9% Pass
  Total score   6 out of 10

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

With a score of 6, Target has much of what conservative investors want to see in a stock. The company didn't get through the recession as smoothly as some of its competitors, but with a long history of treating shareholders right through dividend increases, the stock deserves a closer look.

Target takes an interesting approach to retail. On one hand, it tries to appeal to discount-hungry shoppers, competing on price against Wal-Mart (NYSE: WMT) on everything from apparel to foodstuffs. Yet it also tries to cultivate at least the appearance of "cheap-chic" luxury by making exclusive deals with fashion designers and creating its own brands.

Target wasn't able to avoid the full pain of the economic slowdown. Even as discounters like Wal-Mart and Dollar Tree (Nasdaq: DLTR) saw their shares hold up well , Target suffered big losses in 2008 and has seen greater volatility in its stock. Meanwhile, the company has tried to bolster its Internet sales, but Target's physical stores give it a huge sales-tax disadvantage to online-only retailers (Nasdaq: AMZN) and (Nasdaq: OSTK). Target is part of a coalition that's fighting those sales-tax rules, but it's unclear what results it will have.

What Target has done right over the years is to take care of its investors. The company is one of just three Dividend Aristocrats in the retail space, and although its current yield isn't huge, at less than 2%, its recent dividend growth has been strong. Just last year, the company pushed its payout higher by a whopping 47%.

As the economy continues to rebound, Target is in a good position to snag back customers who deserted it for cheaper pastures. The stock isn't without risk, but retirees and other conservative investors should take note while shares are priced reasonably.

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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