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.
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 Hewlett-Packard.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$49.8 billion||Pass|
|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||2 years||Fail|
|Stock stability||Beta < 0.9||1.08||Fail|
|Worst loss in past five years no greater than 20%||(37.9%)||Fail|
|Valuation||Normalized P/E < 18||8.37||Pass|
|Dividends||Current yield > 2%||2.1%||Pass|
|5-year dividend growth > 10%||6.6%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||15.2%||Pass|
|Total score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Hewlett-Packard last year, the company has lost another point. Although the stock's price drop has boosted its yield, another year of falling revenue and slower dividend growth cost HP in the scoring.
HP's main problem lately is that it hasn't been able to figure out what it wants to be when it grows up. It moved assertively into the low-margin PC business, dethroning Dell
HP really needs higher-margin business to get its growth back. The IBM
In its most recent quarter, HP didn't look like it was closer to a turnaround. Revenue dropped 7%, and earnings per share were down by almost a third from last year's levels. Troubling future guidance also weighed on the stock.
For retirees and other conservative investors, the fact that HP couldn't finance its dividends from free cash flow in the first quarter is of particular concern. Although risk-tolerant value investors may be looking to try to catch this falling knife, anything that jeopardizes the dividend could bring on another round of declines for HP.
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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