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.
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.
What We Want to See
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
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
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.
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 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.