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.
In a rapidly interconnecting world, the primary currency is information. In that realm, Dun & Bradstreet
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 Dun & Bradstreet.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$3.2 billion||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||2 years||Fail|
|Stock stability||Beta < 0.9||0.58||Pass|
|Worst loss in past five years no greater than 20%||(11.7%)||Pass|
|Valuation||Normalized P/E < 18||14.34||Pass|
|Dividends||Current yield > 2%||2.2%||Pass|
|5-year dividend growth > 10%||8.4%||Fail|
|Streak of dividend increases >= 10 years||4 years||Fail|
|Payout ratio < 75%||27.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Dun & Bradstreet scores six points, revealing many of the traits that conservative investors like in a stock. The company has been a vital source of information for businesses for well over a century, and it has thus far navigated the huge technological advances that have changed its industry over that time.
Dun & Bradstreet provides information on businesses around the world, providing reports that customers can use to evaluate prospective business partners before entering into relationships with them. But nowadays, most people are probably more familiar with companies that D&B has spun off over its history.
For instance, in 1996, D&B spun off Cognizant Technology
Collectively, D&B's progeny now dwarf their old parent. But D&B still packs a reasonable punch, with slowing growing sales and free cash flow over the years. That doesn't come easy, though, as competing data sources ranging from IHS
For retirees and other conservative investors, slow growth and a decent dividend make D&B somewhat attractive. For the most part, though, the company has done its best work in creating the companies that it separated from a long time ago.
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 ."