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.
Every gambler knows that unless you're a star poker player or a card-counting blackjack player, the best bet in Vegas is to pick the house. That's why big casino companies such as Las Vegas Sands
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 Las Vegas Sands.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$33.4 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||3 years||Fail|
|Stock stability||Beta < 0.9||3.66||Fail|
|Worst loss in past five years no greater than 20%||(94.2%)||Fail|
|Valuation||Normalized P/E < 18||31.02||Fail|
|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||2 out of 8|
Source: S&P Capital IQ. NM = not meaningful; Las Vegas Sands doesn't pay a dividend on its common stock. Total score = number of passes.
With only a pair of points, Las Vegas Sands looks like an unacceptably risky gamble for conservative investors. It's hard to argue with the stock's big jump over the past few years, but the huge volatility that investors have had to go through to earn it is simply too much for most retirees to withstand.
The gaming industry lately has been a tale of two hemispheres. In Vegas and throughout the U.S., companies such as Boyd Gaming
But one interesting wrinkle in gaming is what will happen with online poker. With recent calls to legalize online poker in the U.S., both Wynn and MGM Resorts
For retirees and conservative investors, though, even all the potential upside for Las Vegas Sands pales in comparison to the stock's risk. Valued at more than 30 times earnings, all it would take is a slowdown in the seemingly unstoppable Asian market to resurrect the same fears that pummeled the stock in 2008 and early 2009. That's not a level of risk that's appropriate for most retirement portfolios.
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.