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 CSX (NYSE: CSX) 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 CSX.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $28.4 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 1.19 Fail
  Worst loss in past five years no greater than 20% (25.1%) Fail
Valuation Normalized P/E < 18 17.48 Pass
Dividends Current yield > 2% 1.9% Fail
  5-year dividend growth > 10% 30.6% Pass
  Streak of dividend increases >= 10 years 7 years Fail
  Payout ratio < 75% 22.7% Pass
  Total score   6 out of 10

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

CSX's six-point score has it running down the rails reasonably well. High energy costs have restored interest in railroads, and it's hard to argue with a share price that has tripled in the past two years.

CSX has 21,000 miles of track in its network, spanning from Florida to Canada and from Boston to Chicago, St. Louis, and New Orleans. Its biggest competitor is Norfolk Southern (NYSE: NSC).

CSX's performance reflects the ongoing cyclical tug-of-war between railroad stocks and trucking companies. With currently high oil prices, railroads throughout the industry, including Union Pacific (NYSE: UNP) and Canadian National Railway (NYSE: CNI), have capitalized on the better fuel efficiency of rail transport. Meanwhile, YRC Worldwide (Nasdaq: YRCW) and other trucking companies have taken huge hits.

For now, CSX is making the most of the opportunity. In its latest quarter, revenue jumped 13%, with earnings per share rising even faster, at 36%. Inside Value lead analyst Philip Durell thinks the stock is the best poised in its industry to see further share-price gains. With a diversified set of transported goods that includes coal, intermodal containers, and other merchandise, CSX isn't too reliant on the fortunes of any one particular commodity.

Although the stock's dividend yield is just a bit under our 2% target, CSX has raised its payout sharply in recent years. Despite the volatility that cyclical stocks endured during the financial crisis, retirees and other conservative investors should strongly consider having transportation sector exposure in their portfolios. For those purposes, CSX could be a strong pick for the future.

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.

Add CSX to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Canadian National Railway. We Fools may not 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.