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 CNOOC (NYSE: CEO) 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 CNOOC.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $97.1 billion Pass
Consistency Revenue growth > 0% in at least four of past five 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 1.17 Fail
  Worst loss in past five years no greater than 20% (43.5%) Fail
Valuation Normalized P/E < 18 14.18 Pass
Dividends Current yield > 2% 2.9 % Pass
  5-year dividend growth > 10% 20.4% Pass
  Streak of dividend increases >= 10 years 6 years Fail
  Payout ratio < 75% 26.4% Pass
  Total score   6 out of 10

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

CNOOC posts a very reasonable score of 6. The state-owned Chinese oil giant has reached out to grab up assets around the world in order to build its position and gain valuable expertise to take back to its home country.

The strategic moves that CNOOC and some other big Chinese oil companies have made lately seem at first glance merely to continue a long-standing practice of acquiring natural resources across the globe. In January, CNOOC bought a 33% stake from Chesapeake Energy (NYSE: CHK) in the U.S. company's oil and gas assets in the Eagle Ford and Niobrara shale areas. Although the company lost its bid on the Ghanaian Jubilee field, it continues to look aggressively for international opportunities, such as an investment in Brazilian oil company OGX.

But the real reason behind CNOOC's move may well be to gain a competitive advantage over CNOOC's peers. Rival PetroChina (NYSE: PTR), which followed up on CNOOC's Chesapeake deal by partnering up with Canada's EnCana (NYSE: ECA) to develop a remote gas project in the Canadian Rockies, and China Petroleum and Chemical (NYSE: SNP) are just a couple of CNOOC's peers that will bid on shale oil assets within China's borders. By teaming up with Chesapeake and others, CNOOC hopes to gain valuable experience and knowledge that will help it win those bids.

Retirees and other conservative investors can point to a strong and growing dividend as reason to grab the stock for their retirement portfolios. Always volatile energy markets remain a constant concern for shareholders, but with China's increasing hunger for energy, CNOOC should remain in a great position to capitalize for years to come.

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 CNOOC 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.