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. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.
The retail industry has gone through plenty of turmoil in recent years, with a deep recession followed by a lackluster recovery. But Tanger Factory Outlet Centers
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 Tanger Factory Outlet.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$2.39 billion||Fail|
|Consistency||Revenue growth > 0% in at least four of past five years||5 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||4 years||Pass|
|Stock stability||Beta < 0.9||0.73||Pass|
|Worst loss in past five years no greater than 20%||0.1%*||Pass|
|Valuation||Normalized P/E < 18||69.88||Fail|
|Dividends||Current yield > 2%||2.9%||Pass|
|5-year dividend growth > 10%||3.5%||Fail|
|Streak of dividend increases >= 10 years||18 years||Pass|
|Payout ratio < 75%||147.1%||Fail|
|Total score||6 out of 10|
Source: S&P Capital IQ. *Tanger's worst stock performance in the past five years was a 0.1% gain in 2007. Total score = number of passes.
With six points, Tanger Factory Outlet gives conservative investors much of what they like from a stock. Despite its exposure to retail trends, the company that pioneered the concept of retail outlet malls is exactly what cash-strapped shoppers have needed in recent years.
Tanger operates dozens of outlet malls across the country. Organized as a real estate investment trust, Tanger must pay out the vast majority of its earnings as dividends. The REIT's success earned it a spot among the top 15 dividend stocks of the millennium this year, along with Southern Copper
But recently, Tanger has had to pay out more than it earned in order to sustain its dividend. Payout ratios over 100% aren't that unusual -- industry giant Simon Property Group
Moreover, Tanger is spending a lot of money to acquire new assets. That's a reasonable gamble when prices are low, but it does mean that Tanger is essentially a leveraged investment on the future health of retail.
For retirees and other conservative investors, a good dividend yield with payout growth looks like a good thing. Despite concerns about the future of its payout, Tanger has already weathered a big storm -- and seems poised to continue doing so.
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.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.