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 Home Depot
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 Home Depot.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $54.6 billion | Pass |
| Consistency | Revenue growth > 0% in at least four of five past years | 2 years | Fail |
| Free cash flow growth > 0% in at least four of past five years | 2 years | Fail | |
| Stock stability | Beta < 0.9 | 0.78 | Pass |
| Worst loss in past five years no greater than 20% | (31.1%) | Fail | |
| Valuation | Normalized P/E < 18 | 16.68 | Pass |
| Dividends | Current yield > 2% | 2.9% | Pass |
| 5-year dividend growth > 10% | 14.2% | Pass | |
| Streak of dividend increases >= 10 years | 2 years | Fail | |
| Payout ratio < 75% | 45.9% | Pass | |
| Total score | 6 out of 10 |
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
Home Depot builds a reasonably impressive case, racking up a score of six. Conservative investors won't find the growth in revenue and free cash flow they like to see, and shares have had a rocky ride in recent years, but the company has rewarded shareholders with rising dividends since the recovery began.
It's no secret that the housing industry has been in the dumps for years, and the companies that help homeowners maintain and renovate their homes haven't escaped the carnage. Both Home Depot and Lowe's
But more recently, signs of life in the housing market and easy comps from weak past periods have helped spur a bounce off the bottom. And although Home Depot saw a small dip on sales and same-store comps in the most recent quarter, it held up better than Lowe's. Even Lumber Liquidators
It's too early to tell whether the housing market has truly hit bottom yet. Even in this bad environment, Home Depot has found ways to keep boosting its dividend payouts while keeping a reasonably low payout ratio. That's what retirees and other conservative investors like to see, but you may prefer to wait until Home Depot proves that it can take advantage of the housing rebound when it comes.
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.
