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 Aetna (NYSE: AET) 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 Aetna.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $14.3 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 3 years Fail
Stock stability Beta < 0.9 1.30 Fail
  Worst loss in past five years no greater than 20% (50.5%) Fail
Valuation Normalized P/E < 18 8.83 Pass
Dividends Current yield > 2% 1.6% Fail
  5-year dividend growth > 10% 76.2% Pass
  Streak of dividend increases >= 10 years 1 year Fail
  Payout ratio < 75% 4% Pass
  Total score   5 out of 10

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

Aetna's score of five doesn't give conservative investors everything they want. But even with the challenges the health-care plan provider has faced lately, Aetna is taking steps in the right direction to make shareholders happy.

Aetna has had to deal with some serious headwinds in health care. Reform is forcing health plan providers to accept patients with pre-existing conditions, and although proponents hope that having a greater number of healthier patients covered by insurance will balance out any added costs, it's still an open question what impact mandated health insurance will actually have.

Despite those concerns, health insurers have seen their stocks rise sharply in the first half of the year. Part of that move may have come from an increasing commitment to dividends that the companies demonstrated recently. In April, Aetna started paying a $0.15 quarterly dividend, quite a bit more than the $0.04 annual payout it had made before. You'll find similar increases from UnitedHealth Group (NYSE: UNH), while both Humana (NYSE: HUM) and WellPoint (NYSE: WLP) initiated dividend payments in 2011.

The move up in share prices early in the year made health insurance stocks less obviously attractive for retirees and other conservative investors. But after the market's recent swoon, shares look attractive again. With Aetna still sporting a single-digit P/E, its new dividend policy may be enough to make you want to take a closer look at the stock 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.

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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."