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.

There aren't many companies that can boast getting the services of their CEO for $1. But Kinder Morgan Energy Partners (NYSE: KMP) does one better: It gets to split the single-greenback cost for CEO Richard Kinder with two other related companies. With consolidation in the industry starting to take shape, Kinder looks like he's ahead of the curve, with a big acquisition in the works. 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 Kinder Morgan Energy Partners.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $27.3 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Fail
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.37 Pass
  Worst loss in past five years no greater than 20% (9.2%) Pass
Valuation Normalized P/E < 18 28.11 Fail
Dividends Current yield > 2% 5.7% Pass
  5-year dividend growth > 10% 7.2% Fail
  Streak of dividend increases >= 10 years 15 years Pass
  Payout ratio < 75% 86.5% Fail
  Total score   5 out of 10

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

With only five points, Kinder Morgan Energy Partners isn't hitting on all cylinders. But while revenue and free cash flow growth has been hit-or-miss in the past five years, the stock has given conservative investors the powerful combination of dampened volatility and healthy, growing dividend payments.

Kinder Morgan Energy Partners is a master limited partnership whose primary assets are refined fuel and natural gas pipelines. Units in Kinder Morgan Energy Partners represent direct ownership of limited partnership interests, whereas alternative Kinder Morgan investments are connected to general partnership interests or indirect ownership of interests in the limited partnership.

The big move for the company this year was Kinder Morgan's deal to buy El Paso (NYSE: EP). That will bring the total under the entire Kinder umbrella to 80,000 miles of pipeline, making it the fourth-largest energy company in the country. But another potentially profitable venture involves building a pipeline with refiner Valero (NYSE: VLO) to connect its Louisiana refineries to markets for refined products in the Southeast.

As attractive as Kinder Morgan Energy Partners' distribution yield is, you can find plenty of high-yielding MLPs that beat it out, including Energy Transfer Partners (NYSE: ETP), Ferrellgas Partners (NYSE: FGP), and Boardwalk Pipeline Partners (NYSE: BWP). But very few MLPs have the 15-year track record of ever-increasing distributions that Kinder Morgan Energy Partners has.

For retirees and other conservative investors, having exposure to energy is a must to get income in today's low-rate environment. As long as people need fuel and natural gas, you can count on Kinder Morgan Energy Partners to be among the big players helping to bring those products to consumers.

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.

And if energy stocks are what you're looking for, let us point the way to some other ideas. Read this free special report and find out about three stocks poised to profit from $100 oil. But don't wait; grab it right now before it's gone.

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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 ."

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.