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 Dow Chemical (NYSE: DOW) 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 Dow Chemical.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $41.1 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 2.27 Fail
  Worst loss in past five years no greater than 20% (59.5%) Fail
Valuation Normalized P/E < 18 16.55 Pass
Dividends Current yield > 2% 2.9% Pass
  5-year dividend growth > 10% (15.3%) Fail
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 41.2% Pass
  Total score   4 out of 10

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

With only four points, Dow Chemical hasn't given conservative investors a lot of comfort in recent years. After letting shareholders down on its dividend during the financial crisis, the largest U.S. chemical company hasn't been able to deliver consistent growth, although the recent past has been more promising.

Two years ago, Dow broke a 97-year streak by making the first dividend cut in the company's history. The chemical company ran into a cash crisis after Kuwait's state oil business backed out of its joint venture with Dow to buy Rohm and Haas. Dow did the deal on its own, borrowing from Berkshire Hathaway (NYSE: BRK-B) and drawing down on bank lines, but it needed to cut the dividend to finance it.

Since then, the company has made a slow but strong recovery. The company has posted record sales in emerging markets while joining competitors DuPont (NYSE: DD) and ExxonMobil (NYSE: XOM) in seeing big profit growth. Given the challenges that smaller players Eastman Chemical (NYSE: EMN) and Ashland (NYSE: ASH) have faced, the Rohm and Haas acquisition has clearly helped Dow gain economies of scale in an industry where size matters.

Dow was even able to restore a big chunk of its lost dividend earlier this year. Although the new rate of $0.25 quarterly per share still falls well short of the $0.41 Dow paid before the 2009 cut, it's a step in the right direction.

The financial crisis revealed Dow's vulnerability to a weak economy and tough financial conditions. Retirees and other conservative investors may not want the risk of that happening again. But Dow seems to be on the right path, and over the long run, those with more risk tolerance might want to make a place for the stock in their retirement portfolios.

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 Dow Chemical 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 owns shares of Berkshire Hathaway. You can follow him on Twitter here. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. 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.