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 Ford (NYSE: F) 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 Ford.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $49.1 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 2.38 Fail
  Worst loss in past five years no greater than 20% (66%) Fail
Valuation Normalized P/E < 18 9.63 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Streak of dividend increases >= 10 years NM NM
  Payout ratio < 75% NM NM
  Total score   2 out of 8

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Ford pays no dividend. Total score = number of passes.

With just two points, Ford doesn't look like the sort of stock that conservative investors would want to buy. Not only has the stock taken shareholders on a wild ride over the past several years, but its lack of a dividend makes it a tough choice for those looking to generate income from their portfolios.

Two years ago, it was far from certain that Ford would survive. Shares fell as low as $1 during the market meltdown as investors assumed the company wouldn't be able to escape the fate of its automotive peers.

It's hard to find fault with Ford's survival skills domestically. Unlike rival General Motors (NYSE: GM), Ford avoided bankruptcy and didn't need government assistance. Its product quality has risen sharply. The company has gone a long way toward eliminating debt and expects to regain an investment-grade bond rating in the near future. After that, the company says, paying dividends may be the next step.

Outside the U.S., though, Ford has made some missteps. In China, for instance, Ford has largely missed the boat, as GM, Honda (NYSE: HMC), and Toyota (NYSE: TM) have made inroads in the emerging market. But Ford boosted its sales in India last year in the light of Tata Motors' (NYSE: TTM) dominance, and Ford also topped the Canadian market for the first time in half a century.

The auto industry has been a dangerous place to invest, as the Big Three's track records show. Despite its relative strength, Ford now faces competitive disadvantages to rivals GM and Chrysler, whose balance sheets are much cleaner after emerging from bankruptcy. Retirees and other conservative investors may want to steer clear of Ford until the industry settles, although those with a tolerance for risk may well find the rewards worth taking a chance on the stock.

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.