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 Cal-Maine Foods (Nasdaq: CALM) 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 Cal-Maine Foods.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $829 million Fail
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 3 years Fail
Stock stability Beta < 0.9 0.42 Pass
  Worst loss in past five years no greater than 20% (4.5%) Pass
Valuation Normalized P/E < 18 14.52 Pass
Dividends Current yield > 2% 3%* Pass
  5-year dividend growth > 10% 83.6% Pass
  Streak of dividend increases >= 10 years 0 years Fail
  Payout ratio < 75% 33.8% Pass
       
  Total score   7 out of 10

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

With a score of 7, Cal-Maine Foods certainly isn't laying goose eggs. The egg producer has given conservative investors just about everything they could ask for in a stock, but it's going to be harder for Cal-Maine to keep the good times rolling.

As a small-cap stock, Cal-Maine isn't the sort of stock you'd expect to see in a conservative retirement portfolio. But the stock got through the market meltdown with flying colors, defying the S&P's 37% loss in 2008 to post a gain. Only last year did the stock finally take a breather.

Recently, though, the company has started to face some headwinds. The same sky-high feed prices that have thrown Tyson Foods (NYSE: TSN), Pilgrim's Pride (NYSE: PPC), and Sanderson Farms (Nasdaq: SAFM) into a high-stakes game of chicken are also poised to cut into Cal-Maine's margins. Cal-Maine has tried to shift to higher-priced items like organic and free-range eggs, but higher costs may be here to stay.

Those risks have short-sellers smelling blood. More than a third of the company's floated shares are currently sold short, as analyst projections have earnings in the next quarter falling dramatically from year-ago levels. Given that the company has an innovative variable dividend policy that adjusts with earnings, that rich dividend yield can shrink in a hurry; the company recently announced that its next dividend would be just $0.102 per share, down from $0.47 in April.

All those concerns might be enough to make some retirees and conservative investors shy away from Cal-Maine. But if you have a tolerance for risk and can endure a down cycle for the stock, Cal-Maine's longer-term performance, along with its room for future growth, may convince you to give it a chance in your 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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter here. 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.