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.

If you need a gas, the odds are good that Air Products & Chemicals (NYSE: APD) can deliver it to you. The company provides any number of gases, ranging from plentiful elementary gases like hydrogen, oxygen, nitrogen, and helium to more specialized gases and chemicals that serve the solar, chemical, and oil and gas industries. But is the company's business model really anything more than just a bunch of hot air? Below, we'll take a look at how Air Products & Chemicals 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 Air Products & Chemicals.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $18.8 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 2 years Fail
Stock stability Beta < 0.9 1.14 Fail
  Worst loss in past five years no greater than 20% (47.8%) Fail
Valuation Normalized P/E < 18 18.38 Fail
Dividends Current yield > 2% 2.6% Pass
  5-year dividend growth > 10% 11.3% Pass
  Streak of dividend increases >= 10 years 29 years Pass
  Payout ratio < 75% 39.4% Pass
  Total score   6 out of 10

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

With six points, Air Products & Chemicals gives conservative investors a lot of what they like to see in a stock. Nearly three decades of dividend growth provides a vote of confidence for the company, even if its shares have been more volatile than you might like.

Air Products is a global company that has exposure to nearly every corner of the planet. One place where it misses out, though, is South America, where rival Praxair (NYSE: PX) has more of a foothold.

In its most recent quarterly release, Air Products posted better-than-expected earnings but fell short on sales targets. Margins have also compressed, which could pose a longer-term threat for the company.

To combat that trend, Air Products was already seeking to raise prices on some of its chemical lines. That's something we've seen from a variety of companies, ranging from DuPont (NYSE: DD) and its steady increase on titanium dioxide prices to Huntsman's (NYSE: HUN) multiple hikes on both titanium dioxide and polyurethane MDI products.

In addition, the company tried but failed to acquire competitor Airgas (NYSE: ARG) in a year-long hostile takeover attempt. Yet organic growth has been hard to come by, with a substantial portion of the company's revenue increases attributable to rising overall prices.

For retirees and other conservative investors, Air Products needs some stronger growth to go with its sterling dividend record. If the economy starts to fire on all cylinders again -- or we get a nice drop in the stock's price to bring valuations down to earth -- then Air Products could make an interesting prospect.

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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