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 Stryker (NYSE: SYK) 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 Stryker.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $24.8 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 0.91 Fail
  Worst loss in past five years no greater than 20% (46%) Fail
Valuation Normalized P/E < 18 21.62 Fail
Dividends Current yield > 2% 1.1% Fail
  5-year dividend growth > 10% 43.1% Pass
  Streak of dividend increases >= 10 years 18 years Pass
  Payout ratio < 75% 19.8% Pass
  Total score   6 out of 10

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

With six points, Stryker gives conservative investors a reasonable range of things they like to see in a stock for their retirement portfolios. The company's shares aren't exactly cheap right now, but the combination of recent revenue growth and steady dividend increases are good selling points for the stock.

Stryker has a big presence in two high-growth areas of health care: orthopedic implants and surgical equipment units. With the implant market controlled almost entirely by just a few companies, which include Zimmer Holdings (NYSE: ZMH), Johnson & Johnson (NYSE: JNJ), and Medtronic (NYSE: MDT), Stryker faces only limited competition.

That said, Stryker has faced challenges during the recession, as health-care spending fell overall. The company isn't able to spend as much on research and development as larger rival Medtronic does. And currently, the shares fetch a higher normalized earnings multiple than any of its three rivals listed above, as well as Smith & Nephew (NYSE: SNN), thanks in part to a big run for its shares over the past year.

For retirees and other conservative investors, a major concern has to be the stock's volatility in recent years. Moreover, a dividend yield of only a bit more than 1% doesn't compare well against J&J or Medtronic, even though the company has increased its payout substantially and has plenty of room to raise it further. Stryker has a lot going for it, though, including positive demographic trends, so you shouldn't hesitate to take a closer look at the stock for your retirement portfolio.

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.