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.

Among pharmaceutical stocks, Abbott Labs (NYSE: ABT) has been a model of consistency. With four decades of dividend growth and its share of lucrative drugs, the company has seen reasonably strong revenue growth over time. But soon, the company will make a strategic decision that will transform it forever. Will it thrive or languish as a result? Below, we'll revisit how Abbott Labs 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 Abbott Labs.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $90.1 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 5 years Pass
  Free cash flow growth > 0% in at least four of past five years 3 years Fail
Stock stability Beta < 0.9 0.30 Pass
  Worst loss in past five years no greater than 20% (8.3%) Pass
Valuation Normalized P/E < 18 19.14 Fail
Dividends Current yield > 2% 3.6% Pass
  5-year dividend growth > 10% 10.2% Pass
  Streak of dividend increases >= 10 years 40 years Pass
  Payout ratio < 75% 62.1% Pass
  Total score   8 out of 10

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

Since we looked at Abbott Labs last year, the company has kept its score the same. But it's almost guaranteed that next year, Abbott will look nothing like it does now.

For those looking for a little exposure into a wide range of different health-care niches, Abbott has been a good choice. The company competes in drug-making, diagnostic tests, nutritional products, and medical devices. But right now, its blockbuster drug Humira accounts for about 20% of the company's total revenue. But with Vertex Pharmaceuticals (Nasdaq: VRTX) and Incyte (Nasdaq: INCY) among several competitors with oral drugs to treat rheumatoid arthritis -- one of the indications Humira is used for now -- things could get tougher for Abbott.

As a result, Abbott has decided to split up its drug business from its other segments. On one hand, the drug side of the business will be even more dependent on Humira in the short run. But the move will free up the rest of the business to seek out better strategic fits of its own. For instance, with Roche having made an offer to buy genetic-equipment maker Illumina (Nasdaq: ILMN), Abbott's diagnostics division would make a logical competing bidder for Illumina -- once complications from the spinoff resolve themselves.

For retirees and other conservative investors, though, the split creates uncertainty. Should you hang on to both resulting stocks, or hang on to one? Until more details are available, it's hard to say -- but if the future is as promising as the past for the stock, holding on to Abbott in whatever form should be a good move.

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 Abbott Labs. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals, Illumina, and Abbott Labs. 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.