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
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
Unfortunately for investors, Kellogg and its peers are battling higher food prices, which can put pressure on profit margins. Kraft, General Mills, and ConAgra
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.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter here. Motley Fool newsletter services have recommended buying shares of Flowers Foods, Kellogg, and Heinz. 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.