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 Southern Co. (NYSE: SO) 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 Southern.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $34.2 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 2 years Fail
Stock stability Beta < 0.9 0.35 Pass
  Worst loss in past five years no greater than 20% (4.9%) Pass
Valuation Normalized P/E < 18 18.61 Fail
Dividends Current yield > 2% 4.7% Pass
  5-year dividend growth > 10% 4.1% Fail
  Streak of dividend increases >= 10 years 10 years Pass
  Payout ratio < 75% 80% Fail
       
  Total score   6 out of 10

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

With a score of six, Southern is generating many of the desirable attributes that conservative investors want from their stocks. The utility company has a strong dividend yield and has seen shares hold up well during the market meltdown, despite seeing the same free-cash-flow challenges that many utilities experience.

As its name suggests, Southern provides electricity to customers in the Deep South. There, it faces competition from the likes of CenterPoint Energy (NYSE: CNP) and NextEra Energy (NYSE: NEE), but Southern's size advantage helps it simply dominate its rivals -- and as a result, Southern carries a richer dividend yield than both.

Utilities are generally seen as a quiet backwater in the investing world. But recent trends toward consolidation suggest that the industry may well get exciting again. Back in May, Exelon (NYSE: EXC) and Constellation Energy (NYSE: CEG) announced merger plans that would create a behemoth in the industry, with the biggest load supply and power generation. Given the geographical diversity within the industry, Southern could pair up with any number of current competitors to challenge an Exelon-Constellation combination.

Southern has seen some of its costs rise lately, as the company must buy coal and natural gas to power its generators. But with its customer contracts, Southern can pass on those higher costs to customers. That minimizes the impact on Southern and helps it keep its financial results less volatile.

Retirees and other conservative investors have long flocked to utility stocks for protection and healthy income. If you're looking to increase your utility exposure, Southern looks like a reasonable way to get into the space.

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 Southern 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 in this article. You can follow him on Twitter here. The Fool owns shares of and has written puts and covered strangles on NextEra Energy. Motley Fool newsletter services have recommended buying shares of Southern and Exelon, as well as creating a covered strangle position in Exelon. 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.