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.

It's hard playing second fiddle in one of the biggest, most important industries in the business world. Ordinarily, a company Chevron's (NYSE: CVX) size would be far and away the industry leader, but next to the elephantine ExxonMobil (NYSE: XOM), Chevron looks almost like a small-fry. But the big question is this: As a famous rental car company once said, does being No. 2 make Chevron try harder? Below, we'll revisit how Chevron 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 Chevron.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $212 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 0.78 Pass
  Worst loss in past five years no greater than 20% (18.3%) Pass
Valuation Normalized P/E < 18 7.17 Pass
Dividends Current yield > 2% 3% Pass
  5-year dividend growth > 10% 9% Fail
  Streak of dividend increases >= 10 years 24 years Pass
  Payout ratio < 75% 22.1% Pass
  Total score   8 out of 10

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

Since we looked at Chevron last year, the company has actually lost a point. Even with two dividend increases in the past year, Chevron's dividend growth rate fell just under the 10% benchmark.

With oil prices above $100 per barrel, you'd think that Chevron would be doing well. Even perennial natural-gas giant Chesapeake Energy (NYSE: CHK) has started shifting more of its production over to the oil side of the business.

Yet integrated oil companies are feeling the push and pull of high oil prices. In their latest quarters, both Chevron and Exxon cited challenges for their downstream refining and marketing divisions as offsetting favorable trends elsewhere. It's the disconnect between exploration and refining that led Marathon Oil to spin off its Marathon Petroleum (NYSE: MPC) refinery business into a separate stock, unlocking value for both businesses. ConocoPhillips (NYSE: COP) expects to make a similar move this year for the same reason.

Yet production also hasn't grown as much for Chevron as it would like. Even though the company avoided the outright decline that Exxon saw, Chevron still needs to see the natural gas side of its business rebound. Higher prices could definitely help on that score, although with the huge glut of gas right now, that seems unlikely, at least in the near term.

For retirees and other conservative investors, Chevron remains an attractive play, with a healthy and growing dividend. But like its peers, Chevron is vulnerable to a price decline for oil -- if it comes, then shares could drop significantly.

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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

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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 Chesapeake Energy and Chevron. 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.