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 and then examine whether American Express
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. Many investors look for rapidly growing companies, but 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 do, 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 quickly during bear markets. Beta measures volatility, but we 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 American Express.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$58.8 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||1.93||Fail|
|Worst loss in past five years no greater than 20%||(63.7%)||Fail|
|Valuation||Normalized P/E < 18||16.42||Pass|
|Dividends||Current yield > 2%||1.5%||Fail|
|5-year dividend growth > 10%||8.4%||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||20.0%||Pass|
|Total score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
American Express can charge up only 5 points, lacking several key attributes that conservative investors prefer to see from stocks in their portfolios. The financial crisis sent the company for a big loop, but as the economy improves, so, too, have its prospects going forward.
American Express has an interesting business. Like Visa
During the recession, that approach caused AmEx a lot of pain. Like Bank of America
Lately, with rising interest in electronic wallets that would let consumers use smartphones to make purchases, AmEx has come up with its Serve service, which will go up against both rival card issuers and networks as well as PayPal. The business is changing rapidly, though, and AmEx will have to work hard to maintain its position.
American Express is a well-known name, but as the past several years have shown, it carries substantial risk. With a mediocre dividend yield, AmEx still has something to prove before retirees and other conservative investors will feel comfortable adding it to their portfolios.
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 have the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Visa. The Fool owns shares of Bank of America and has also shorted the stock in a separate account. We Fools don't 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.