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.
The banking crisis in Europe has gained worldwide notoriety, and one of the stocks near the epicenter of the trouble is Spain's Banco Santander
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 Banco Santander Brasil.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$30.2 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||3 years||Fail|
|Stock stability||Beta < 0.9||0.97||Fail|
|Worst loss in past five years no greater than 20%||(54.9%)||Fail|
|Valuation||Normalized P/E < 18||8.09||Pass|
|Dividends||Current yield > 2%||4.3%||Pass|
|5-year dividend growth > 10%||NM||NM|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||50.3%||Pass|
|Total score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Banco Santander Brasil had its U.S. IPO in October 2009 and paid its first dividend shortly thereafter. Total score = number of passes.
With five points, Banco Santander Brasil clearly hasn't avoided all the turmoil that hurt the portfolios of conservative investors over the past several years. But despite the name association that investors have with its Spanish relative, the Brazilian bank offers access to Latin America's growth -- as well as some healthy dividends -- without the baggage of European risk.
Banco Santander Brasil couldn't have picked a worse time to come public. It was one of only three IPOs for more than $1 billion in 2009. Yet the move gave its Spanish parent some flexibility to raise capital if necessary. With it retaining an ownership of Banco Santander Chile
Moreover, economic conditions in Brazil may be starting to deteriorate. Homebuilder Gafisa
For retirees and conservative investors, though, it's easy to take some comfort in Banco Santander Brasil's trailing dividend yield of more than 4%. That's markedly down from 2010's levels, but therein lines much of the appeal -- anything short of economic Armageddon should give the stock quite a bit of room to run. If you're afraid of U.S. banks, you may want to consider Banco Santander Brasil as an alternative.
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.
If you want the best bank stocks you can find, we've got the right stuff for you. Read the Motley Fool's latest special report on banking to find out which banks the smartest investors are buying now. The report is free, but it won't be there forever, so check it out today.
Add Banco Santander Brasil 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. Motley Fool newsletter services have recommended buying shares of Petroleo Brasileiro. 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.