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.

Conservative investors have always looked to utilities like Dominion Resources (NYSE: D) to provide healthy, consistent, and reliable dividend income for their portfolios. But in recent years, the utility industry has gotten a lot more competitive, with regional near-monopolies giving way to incursions from rivals and industry consolidation. Does Dominion have what it takes to compete? Below, we'll look at how the company does on our 10-point scale.

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 Dominion Resources.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $28.8 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 2 years Fail
  Free cash flow growth > 0% in at least four of past five years 1 year Fail
Stock stability Beta < 0.9 0.49 Pass
  Worst loss in past five years no greater than 20% (21.6%) Fail
Valuation Normalized P/E < 18 14.81 Pass
Dividends Current yield > 2% 3.9% Pass
  5-year dividend growth > 10% 7.2% Fail
  Streak of dividend increases >= 10 years 8 years Fail
  Payout ratio < 75% 74% Pass
  Total score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of five, Dominion Resources has some but definitely not all of the traits conservative investors like from a stock. The utility stands up pretty well on the dividend front, but weak revenue growth and free cash flow, while not unusual in the industry, raise a few concerns.

Based in Virginia, Dominion delivers electricity and natural gas to residential, business, and government customers in several states in the eastern U.S., as well as generating electricity through power plants that use a variety of fuels. It also has the largest natural-gas storage facility in the country, having kept it for use in its gas utility business even after selling off its natural-gas resources to Consol Energy (NYSE: CNX) last year.

Recently, the company has shifted more toward the regulated utility side of its business. That should help it have more stable results going forward, although it also cuts off some of its growth potential. Moreover, even though Dominion pays a lower yield than Exelon (NYSE: EXC), Southern (NYSE: SO), or Duke Energy (NYSE: DUK), its dividend growth rate over the past five years has been higher than those competitors' -- and that trend could result in higher yields for Dominion as its business mix shifts.

For retirees and other conservative investors, the biggest concern is that poor revenue and free cash flow could eventually threaten Dominion's dividend. Even if you're looking to add utility exposure to your portfolio, you might do better if you wait and see how Dominion's transition goes before you buy.

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 ."