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 Rio Tinto
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 Rio Tinto.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$133.5 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||4 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||1.08||Fail|
|Worst loss in past five years no greater than 20%||(79.1%)||Fail|
|Valuation||Normalized P/E < 18||10.19||Pass|
|Dividends||Current yield > 2%||1.8%||Fail|
|5-year dividend growth > 10%||6.2%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||12.2%||Pass|
|Total score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With just five points, Rio Tinto isn't delivering everything that conservative investors would like to see in a stock. But even with concerns about a possible slowdown in emerging market growth, the company has plenty of positive long-term prospects that should keep shareholders happy.
Like fellow mining rivals BHP Billiton
Nevertheless, the company is still trying to move forward. Last week, the company formed a joint venture with Chinalco
More recently, fears of overheating emerging economies has put some investors on the defensive. But as Global Gains co-advisor Nathan Parmelee points out, Rio Tinto has its hand in ongoing Chinese infrastructure projects such as high-speed rail, subway systems, and rural infrastructure improvements, and even a slowdown in future spending isn't likely to derail that huge backlog for years to come.
As you can see above, Rio Tinto's shares haven't given investors a smooth ride, especially with huge volatility in commodity markets. But if you think natural resources will play an increasingly vital role in the years to come, Rio Tinto is worth a look even for retirees and other conservative investors.
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.