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 BHP Billiton (NYSE: BHP) 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 BHP Billiton.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $253.6 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 4 years Pass
Stock stability Beta < 0.9 0.67 Pass
  Worst loss in past five years no greater than 20% (38.6%) Fail
Valuation Normalized P/E < 18 15.85 Pass
Dividends Current yield > 2% 1.96% Fail
  5-year dividend growth > 10% 23.2% Pass
  Streak of dividend increases >= 10 years 9 years Fail
  Payout ratio < 75% 28.3% Pass
  Total score   7 out of 10

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

With a score of seven, BHP Billiton is clearly giving conservative investors many of the things they want from stocks in their retirement portfolios. With the future of the commodities boom in question, though, the company may not have the same tailwinds behind it that it's enjoyed in recent years.

BHP may be best known for its top position in the iron ore market, as it wrangles with Rio Tinto (NYSE: RIO) and Vale (NYSE: VALE) for supremacy in providing a key raw material for steel production. But the world's largest mining company produces a wide variety of other resources, including aluminum, copper, diamonds, and coal.

Despite having been rebuffed in its attempt to buy out fertilizer producer PotashCorp (NYSE: POT), BHP is continuing to make strategic moves to grow and diversify. A few years back, it partnered with Repsol (OTC BB: REPYY.PK) and Hess (NYSE: HES) with successful oil discoveries in the Gulf of Mexico, and BHP recently acquired shale-energy assets from Chesapeake Energy (NYSE: CHK).

With commodity prices having remained high, the company has posted strong earnings lately. The recent drop in commodities coupled with slowing Chinese growth may reverse that trend in the short run, but over the long haul, BHP's top position in global mining should make it a worthy holding even for retirees and other conservative investors.

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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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.