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 Kellogg (NYSE: K) 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 Kellogg.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $20.0 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 2 years Fail
Stock stability Beta < 0.9 0.47 Pass
  Worst loss in past five years no greater than 20% (14.1%) Pass
Valuation Normalized P/E < 18 18.68 Fail
Dividends Current yield > 2% 2.9% Pass
  5-year dividend growth > 10% 7.9% Fail
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 49.4% Pass
  Total score   5 out of 10

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

Kellogg weighs in with a score of 5, leaving conservative investors missing some of the stable growth they like to see in a stock for their retirement portfolios. The food maker has seen some tough trends appear in recent years, but it's doing what it can to use its strong brand to stay successful.

Many investors have turned to food stocks for their dividend potential. Heinz (NYSE: HNZ) and Flowers Foods (NYSE: FLO) are among Kellogg rivals that have already made significant dividend increases this year, and Kellogg announced plans for a higher dividend coming next quarter. Although Kraft (NYSE: KFT) and General Mills (NYSE: GIS) haven't yet followed suit, they share a longer-term record of raising dividends that compares fairly well with Kellogg.

Unfortunately for investors, Kellogg and its peers are battling higher food prices, which can put pressure on profit margins. Kraft, General Mills, and ConAgra (NYSE: CAG) have all mentioned higher input costs as factors having an impact on earnings. But because of its core brand loyalty, Kellogg is in a better position than some of its competitors to pass on higher costs to consumers, who in turn have trouble substituting Kellogg products with lower-priced alternatives without sacrificing quality.

Nevertheless, falling revenue and free cash flow pose big challenges for Kellogg. Combined with a valuation that isn't incredibly cheap right now, retirees and other conservative investors looking to add stocks to their retirement portfolios might find safer stocks elsewhere. It's definitely worth keeping an eye out for possible bargains on dips, but for now, Kellogg may not be a financially nutritious part of a balanced breakfast portfolio.

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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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."