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 Siemens
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 Siemens.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$110.3 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of past five years||3 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||1.00||Fail|
|Worst loss in past five years no greater than 20%||(52.5%)||Fail|
|Valuation||Normalized P/E < 18||15.92||Pass|
|Dividends||Current yield > 2%||3.0%||Pass|
|5-year dividend growth > 10%||14.9%||Pass|
|Streak of dividend increases >= 10 years||2 years||Fail|
|Payout ratio < 75%||43.2%||Pass|
|Total score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Siemens scores six points, which shows that the company gives conservative investors some but not all of the most attractive characteristics of a stock for a retirement portfolio. The industrial giant covers a broad range of industries, which carries both benefits and potential hazards.
Siemens is an incredibly broad-based conglomerate. Along with General Electric
Needless to say, the global recession over the past few years has hurt Siemens' overall business. Although its stock hasn't been as volatile as GE's, Siemens still lost half its value during the 2008 bear market.
Because of its breadth, it's hard to compare Siemens to its more focused competitors. Inevitably, though, Siemens will act as a proxy for the strength of German stocks as well as the viability of the European economic zone more broadly.
Despite having a healthy dividend and trading at a reasonable valuation, Siemens hasn't given investors the smoothest ride in recent years. But for retirees and other conservative investors seeking exposure to the Eurozone even in its time of crisis, Siemens may be a good way to get it.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs. Motley Fool newsletter services have recommended buying shares of Abbott Labs. 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.