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 Nordstrom (NYSE: JWN) 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 Nordstrom.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $9.5 billion Fail
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 3 years Fail
Stock stability Beta < 0.9 1.74 Fail
  Worst loss in past five years no greater than 20% (62.6%) Fail
Valuation Normalized P/E < 18 14.81 Pass
Dividends Current yield > 2% 2.1% Pass
  5-year dividend growth > 10% 18.2% Pass
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 28.5% Pass
  Total score   5 out of 10

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

With a score of just 5, Nordstrom may not look like the ideal stock for conservative investors. But despite the pounding that retail stocks in general have taken during the recession and slow recovery, Nordstrom has done right by shareholders, maintaining and even increasing dividends over time.

The retail industry has shown some strange performance lately. On one hand, discounters Family Dollar (NYSE: FDO) and Dollar Tree (Nasdaq: DLTR) have benefited by focusing on the extreme low-end of the retail spectrum. At the same time, luxury-oriented retailers Tiffany (NYSE: TIF) and Coach (NYSE: COH) have shown strong sales momentum, suggesting that high-end customers are still willing to spend money even with ongoing major economic uncertainties -- good news for Nordstrom.

In its most recent quarter, Nordstrom announced impressive results. Net income jumped 25% as revenue rose 12%. Same-store sales comps saw a 6.5% rise. But concerns over commodity prices, along with the company's recent buyout of Groupon-like dealmaker HauteLook, left shareholders with mixed thoughts.

Nothing is certain right now for retail. But over the long haul, Nordstrom's shareholder initiatives, which include both its history of dividend increases and almost $1 billion in potential share buybacks coming through 2013, are positive for investors. For retirees and other conservative investors looking to get retail exposure for their retirement portfolios, Nordstrom may be a better choice than its score would suggest.

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.