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 Gap (NYSE: GPS) 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 Gap.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $10.8 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 1.19 Fail
  Worst loss in past five years no greater than 20% (35.9%) Fail
Valuation Normalized P/E < 18 10.32 Pass
Dividends Current yield > 2% 2.3% Pass
  5-year dividend growth > 10% 13.9% Pass
  Streak of dividend increases >= 10 years 4 years Fail
  Payout ratio < 75% 22.1% Pass
       
  Total score   5 out of 10

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

With five points, Gap gives conservative investors only part of what they like to see. Although middle-aged consumers may feel comfortable with the retailer's products, the stock hasn't given them a good fit in recent years.

Retail has been a tough play lately. With high prices on necessities like food and gasoline, shoppers have less discretionary income to spend on high-margin clothing items. That has taken its toll on a number of companies in the space, including Coldwater Creek (Nasdaq: CWTR), Buckle (NYSE: BKE), and Aeropostale (NYSE: ARO).

But Gap has taken an especially hard hit. Falling net income, revenue, and same-store sales aren't just a one-time issue for Gap; they're a recurring theme. The company has struggled to make itself relevant to younger shoppers, but last fall's logo disaster was just the latest example of how badly that effort has gone.

With discounters such as Costco (Nasdaq: COST) dominating retail right now, Gap will continue to struggle. As a value play, the stock has some merit, and retirees and other conservative investors may like what it's done with its dividend lately. But until the underlying business shows more signs of life, risk-averse investors won't want to fall into the Gap.

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 Gap 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 Motley Fool owns shares of Aeropostale, Gap, and Costco. Motley Fool newsletter services have recommended buying shares of Costco. 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.