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
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
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
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.
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.
Add Kinder Morgan Energy Partners 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. 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.