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.
It's hard to think of a company that has made a larger impact on the world of technology than Apple
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 Apple.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$349.6 billion||Pass|
|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||5 years||Pass|
|Stock stability||Beta < 0.9||1.22||Fail|
|Worst loss in past five years no greater than 20%||(56.9%)||Fail|
|Valuation||Normalized P/E < 18||16.53||Pass|
|Dividends||Current yield > 2%||0%||Fail|
|5-year dividend growth > 10%||0%||Fail|
|Streak of dividend increases >= 10 years||NM||NM|
|Payout ratio < 75%||NM||NM|
|Total score||4 out of 8|
Source: S&P Capital IQ. NM = not meaningful; Apple pays no dividend. Total score = number of passes.
With 4 points, Apple reveals a huge shortcoming that conservative investors will definitely pick up on: its lack of a dividend. Some would disagree with the huge impact that has on our 10-point scale, but with other tech giants finally getting on the dividend bandwagon, Apple could remedy the situation quite easily with its huge cash hoard.
Apple stands out as one of the top growth stocks of the past 10 years. The company managed to sustain sales and free cash flow growth even during the recession, thanks to its string of innovations. Routinely, dozens of suppliers, including camera-sensor maker OmniVision Technologies
More than anything else, the iPhone is behind this explosion in profitability. Because of subsidies from carriers AT&T
But for the first time in years, Apple missed earnings estimates in the third quarter. Many blamed short-term delays that arguably shouldn't repeat, but others point to Amazon.com's
The one criticism that at least a few Apple investors have had is that the company has built a huge bundle of cash that sits on its balance sheet. Even longtime holdouts Cisco
Without the dividend, retirees and conservative investors have to weigh the company's undeniable growth prospects and extremely attractive valuation with its share-price volatility. If you don't depend on income from your retirement portfolio, then Apple could be a good buy despite its relatively poor score on this scale.
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 Apple 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 ."
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of TriQuint Semiconductor, Oracle, Cisco, and Apple, as well as a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Apple, Cisco, and Amazon.com, as well as creating a bull call spread position on Apple. We Fools don't 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.