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.
With the world's population growing above 7 billion recently, few things are more important than making food. Fertilizer companies like Terra Nitrogen
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 Terra Nitrogen.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$3.55 billion||Fail|
|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||0.72||Pass|
|Worst loss in past five years no greater than 20%||(28.7%)||Fail|
|Valuation||Normalized P/E < 18||12.78||Pass|
|Dividends||Current yield > 2%||8.3%||Pass|
|5-year dividend growth > 10%||44.3%||Pass|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||80.6%||Fail|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With only four points, Terra Nitrogen isn't growing confidence among conservative investors, who seek more from the stocks they prefer. You can't argue with the fertilizer maker's dividend, but big swings in sales and cash flow show just how volatile the ag sector can be.
2011 was a great year for Terra Nitrogen. With high food prices, farmers could afford to pay for fertilizer. Moreover, Terra Nitrogen in particular benefited from its nitrogen-based fertilizers, which cost a lot less to produce than mineral-intensive fertilizers such as potash. The challenges of potash production were a big reason why PotashCorp
Looking forward, plans for farmers to increase plantings bode well for Terra Nitrogen this year. But competitor CVR Partners
Retirees and other conservative investors should keep in mind that Terra Nitrogen's big dividend yield comes from its status as a master limited partnership, with majority control resting in CF Industries
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. The Motley Fool owns shares of CF Industries. 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.