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 UnitedHealth Group (NYSE: UNH) 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 UnitedHealth Group.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $52.0 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 4 years Pass
Stock stability Beta < 0.9 0.97 Fail
  Worst loss in past five years no greater than 20% (54.3%) Fail
Valuation Normalized P/E < 18 11.03 Pass
Dividends Current yield > 2% 1% Fail
  5-year dividend growth > 10% 75.5% Pass
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 12.2% Pass
  Total score   6 out of 10

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

With six points, UnitedHealth does a pretty good job of keeping conservative investors' portfolios healthy. The company has faced plenty of uncertainty with health-care reform lately, but solid fundamentals and a cheap valuation make the shares attractive.

UnitedHealth has had to deal with plenty of changes in the past several years. With health-care reform eliminating its ability to deny coverage to those with pre-existing conditions, it's essential for the company to have healthier people getting coverage to balance out the added costs. Yet mandated health insurance has come under attack, and it's unclear whether courts will uphold the requirement.

Reform also required insurers to spend certain minimum amounts on paying claims, raising concerns that profits would get pinched. But in its most recent quarter, UnitedHealth saw sales rise almost 10%, with earnings coming in well ahead of analyst expectations.

Despite the longer-term uncertainties, UnitedHealth has taken action to benefit shareholders. Last year, the company was the first to boost its dividend from a token annual payout to its current $0.50 level. Since then, Aetna (NYSE: AET) has made a similar increase, and WellPoint (NYSE: WLP) paid its first dividend earlier this year. But Humana (NYSE: HUM) still doesn't pay a dividend, and Cigna (NYSE: CI) has kept its token payout unchanged this year.

Health insurance is in flux, and retirees and other conservative investors may want to steer clear of the space for that reason. But if you're willing to take some risk, shares trading at bargain-basement multiples could be poised for gains once the situation clarifies in the future.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.