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.

PepsiCo (NYSE: PEP) may not be top dog in the beverage business, but the company has a lot going for it. With a two-pronged attack in both drinks and snacks, PepsiCo gives investors a lot more diversification than its rivals. But is being a perennial No. 2 in cola a handicap that the company simply won't overcome in the long run? Below, we'll revisit how PepsiCo 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 PepsiCo.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $98.7 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 5 years Pass
Stock stability Beta < 0.9 0.51 Pass
  Worst loss in past five years no greater than 20% (26.0%) Fail
Valuation Normalized P/E < 18 16.84 Pass
Dividends Current yield > 2% 3.4% Pass
  5-year dividend growth > 10% 11.8% Pass
  Streak of dividend increases >= 10 years 39 years Pass
  Payout ratio < 75% 49.0% Pass
       
  Total score   9 out of 10

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

Since we looked at PepsiCo last year, the company has managed to keep its nine-point score. More important, it's not giving up on grabbing that final point.

Pepsi has obviously faced down Coca-Cola (NYSE: KO) for decades, competing for the same business around the world. Lately, the battleground has largely been outside the U.S., where international growth prospects have been a lot stronger.

But it's the snack business that has investors excited these days. After a drawn-out attempt to sell its Pringles division to Diamond Foods (Nasdaq: DMND), Procter & Gamble (NYSE: PG) finally gave up on the deal after Diamond saw its CEO and CFO depart amid accounting irregularities. With Kellogg (NYSE: K) swooping in to pick up Pringles instead, Pepsi will face chip competition from an established food giant, as Kellogg will now be No. 2 in snacks to Pepsi's Frito-Lay.

Pepsi isn't afraid to spend money bolstering its business. This year, the company plans to spend $500 million to $600 million on ads, along with an extra $100 million on innovative shelving designs and better in-store displays.

For retirees and other conservative investors, though, the key to Pepsi's success has been its long-standing practice of rewarding shareholders through dividends. With its current streak of annual increases approaching the four-decade mark, Pepsi has what it takes to earn a place in just about every retirement portfolio.

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. The Motley Fool owns shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Procter & Gamble, and PepsiCo, as well as creating a diagonal call position in PepsiCo. 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.