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 HCP (NYSE: HCP) 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 HCP.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $15.0 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 1.29 Fail
  Worst loss in past five years no greater than 20% (15.4%) Pass
Valuation Normalized P/E < 18 62.27 Fail
Dividends Current yield > 2% 5.2% Pass
  5-year dividend growth > 10% 2.5% Fail
  Streak of dividend increases >= 10 years 23 years Pass
  Payout ratio < 75% 197.8%* Fail
  Total score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. *Payout ratio includes preferred stock payouts. Total score = number of passes.

With six points, HCP gives conservative investors a healthy dose of positive attributes in an investment. Although commercial real estate overall has been a hit-or-miss proposition in recent years, HCP finds itself in an interesting subsector of the industry.

HCP is a health-care real estate investment trust, owning, managing, and financing properties including hospital facilities, senior housing, and medical office buildings. That's been a lucrative area to be in, as health care didn't drop off as much as some other areas during the recession, and it remains a growth industry even in a sluggish recovery.

Last year, the industry went through massive consolidation. HCP made a $6.1 billion purchase of HCR Manor Care, while Ventas (NYSE: VTR) bought Nationwide Health Properties to form the nation's largest health-care REIT. Then earlier this year, Health Care REIT (NYSE: HCN) agreed to buy Genesis Healthcare in a $2.4 billion deal. Those buyouts have pushed up interest in other smaller players in the industry, such as Omega Healthcare (NYSE: OHI) and Universal Health Realty (NYSE: UHT).

With demographic trends favoring increased needs for health care, HCP seems to be in the right place at the right time. The company is vulnerable to the rapidly changing regulatory environment for delivering health-care services, which is likely behind the above-average volatility in the stock.

Retirees and conservative investors should remember that as a REIT, HCP must pay out most of its earnings in the form of dividends, and so payout ratios will always be higher than with other types of stocks. Nevertheless, HCP is worth consideration as a promising way to diversify a retirement 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.

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 Health Care REIT. 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.