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.
Water is the world's most precious resource, and its value is only going to go up as population increases threaten to create shortages. Amid the looming crisis, American States Water
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 American States Water.
Factor |
What We Want to See |
Actual |
Pass or Fail? |
---|---|---|---|
Size |
Market cap > $10 billion |
$653 million |
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 |
2 years |
Fail |
|
Stock stability |
Beta < 0.9 |
0.34 |
Pass |
Worst loss in past five years no greater than 20% |
(9.9%) |
Pass |
|
Valuation |
Normalized P/E < 18 |
13.96 |
Pass |
Dividends |
Current yield > 2% |
3.2% |
Pass |
5-year dividend growth > 10% |
3.3% |
Fail |
|
Streak of dividend increases >= 10 years |
57 years |
Pass |
|
Payout ratio < 75% |
50.3% |
Pass |
|
Total score |
7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
With seven points, American States Water cleans up for conservative investors that like solid dividends and stable prices. With well over half a century of annual dividend increases, the water utility is still poised in a strong growth industry with plenty of potential.
American States Water is a small company that primarily focuses its efforts on the water-starved areas of California and Arizona. Yet while industry leaders like American Water Works
American States Water also stands out from similarly sized companies like California Water Service
For retirees and conservative investors, the prospects of growth are nice, but what's really appealing is the company's 3%-plus dividend yield. Moreover, with the possibility of consolidation within the industry, shareholders could end up getting a nice acquisition premium at some point in the future. The combination of income while you wait and catalysts to boost share prices adds up to an attractive prospect for retirement portfolios.
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.