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.
Energy is the lifeblood of the world economy, but in order for it to do its job, oil and gas have to make their way to where they're needed. Natural gas pipeline company Spectra Energy
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 Spectra Energy.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$20.1 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||4 years||Pass|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||0.95||Fail|
|Worst loss in past five years no greater than 20%||(36.3%)||Fail|
|Valuation||Normalized P/E < 18||17.92||Pass|
|Dividends||Current yield > 2%||3.6%||Pass|
|5-year dividend growth > 10%||5.2%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||55.5%||Pass|
|Total score||5 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only five points, Spectra Energy doesn't quite deliver everything conservative investors like to see from a stock. The company's dividend is attractive, but stagnant free cash flow and a stock price that appears to be near full value are marks against Spectra.
Spectra is the result of a spinoff from Duke Energy
Since then, many gas producers have struggled. Chesapeake Energy
But the thing about the pipeline business is that volume can be just as important as price. With new sources of natural gas coming on-line all the time, pipeline infrastructure has never been more essential, as the controversy over TransCanada's
Moreover, big players in the industry are realizing the importance of pipelines and making strategic moves to boost their networks. With the Kinder Morgan proposed acquisition of El Paso
For retirees and other conservative investors, Spectra's combination of regulated gas utility business and broader pipeline exposure offers both current income and potential growth. That may be worth paying a fair-value price for, especially if you want more energy exposure in your retirement portfolio.
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of TransCanada, Chesapeake Energy, and Spectra Energy. 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.