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 Cisco Systems (Nasdaq: CSCO) 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 Cisco Systems.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $89.0 billion Pass
Consistency Revenue growth > 0% in at least four of five past 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 1.22 Fail
  Worst loss in past five years no greater than 20% (39.8%) Fail
Valuation Normalized P/E < 18 16.50 Pass
Dividends Current yield > 2% 1.5% Fail
  5-year dividend growth > 10% NM NM
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 4.6% Pass
  Total score   4 out of 9

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful; Cisco just started paying a dividend in March 2011. Total score = number of passes.

With just four points, Cisco Systems is missing many of the attributes that conservative investors like to find in a stock. Not only has the stock been extremely volatile, but Cisco's growth has slowed markedly, raising concerns about the company's leadership prospects going forward.

Early in its history, Cisco built a reputation as the leading networking infrastructure provider. That reputation led to positive feedback loops, as companies like IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ) would act as Cisco resellers when putting together larger-scale information technology solutions. But when Cisco went into the server business, directly competing with IBM and HP, it lost those positive effects. That opened the door for networking peers Juniper Networks (NYSE: JNPR) and Brocade Communications (Nasdaq: BRCD) to siphon off Cisco's business.

All that said, Cisco has seen its shares plummet, and many investors -- including analysts at two Fool newsletters -- see the stock as a compelling value. Fool analyst Matthew Richey argues that the company is priced for no growth despite having industry-leading share in several key markets.

Cisco's value prospects may be enough for risk-tolerant investors. Also, the company started paying a dividend earlier this year, boosting its attractiveness to retirees and more conservative investors. But given the huge volatility this stock has seen recently and its ongoing challenges, Cisco may well give you a bumpier ride than you want to take on in 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 ."

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.