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 and then examine whether Ross Stores (Nasdaq: ROST) 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 Ross Stores.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $8.9 billion Fail
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.72 Pass
  Worst loss in past five years no greater than 20% (11.8%) Pass
Valuation Normalized P/E < 18 15.25 Pass
Dividends Current yield > 2% 1.2% Fail
  5-year dividend growth > 10% 27.0% Pass
  Streak of dividend increases >= 10 years 17 years Pass
  Payout ratio < 75% 14.3% Pass
       
  Total score   7 out of 10

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

With 7 points, Ross Stores is almost as appealing to conservative investors looking for a stock as the retailer's wares are to its best customers. The discount retailer has tapped into an important niche, given the economy's ongoing struggles.

Shoppers have made two things clear during the recession. First, many shoppers are still willing to spend up for luxury items, as strong results from high-end retailers Tiffany (NYSE: TIF) and Coach (NYSE: COH) have shown. At the same time, they like big bargains, which has helped awaken ultra-discounters Dollar Tree (Nasdaq: DLTR) and Family Dollar (NYSE: FDO) to take on some of the biggest mainstream retailers in the nation.

The great thing about Ross is that it appeals to both the luxury desire and the bargain need. Like competitor TJX (NYSE: TJX), Ross acquires high-end merchandise from retailers trying to get rid of extra inventory and then resells it at big discounts.

Both Ross and TJX have put up impressive numbers. But for retirees and other conservative investors, Ross has a couple of important edges. It held up much better than TJX during the market meltdown, with Ross' worst recent year actually coming in 2007 rather than in 2008. In addition, Ross has grown its dividend at a somewhat faster pace yet has a lower payout ratio, giving it potentially more room to boost its payout in the future.

Retail is a tough business, but so far, Ross has made all the right moves. The stock is worth a look for 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.

Add Ross Stores 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 have the basics of your investment strategy down pat. See whether 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. Motley Fool newsletter services have recommended buying shares of Coach. We Fools don't 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.