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 farming industry has done very well lately, with rising crop prices supporting farming profits even amid higher costs for fuel and other needed supplies. When farmers are doing well, they spend on products to increase their yields, and Monsanto (NYSE: MON) has been a beneficiary of that trend. But with a major drought affecting much of the country, can the good times last for farming? Below, we'll revisit how Monsanto 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 Monsanto.


What We Want to See


Pass or Fail?

Size Market cap > $10 billion $45.5 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 0.91 Fail
  Worst loss in past five years no greater than 20% (36.5%) Fail
Valuation Normalized P/E < 18 23.25 Fail
Dividends Current yield > 2% 1.4% Fail
  5-year dividend growth > 10% 20.4% Pass
  Streak of dividend increases >= 10 years 11 years Pass
  Payout ratio < 75% 29.2% Pass
  Total score   5 out of 10

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

Since we looked at Monsanto last year, the company has kept its five-point score. Even though the stock is up more than 10% in the past year, it still carries a hefty valuation, and volatility has picked up.

Monsanto has had plenty of ups and downs. Its landmark Roundup herbicide was incredibly popular for years, but resistant weeds increasingly have reduced its effectiveness. That has made it easier for rival products from DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) to gain a footing in the competitive industry.

But Monsanto has stood out from the crowd lately. One reason may be its focus on seeds, which gives it the benefits of patent protection versus more commoditized agricultural chemicals that DuPont and Syngenta (NYSE: SYT) produce. In particular, Monsanto's drought-resistant corn couldn't have come with better timing, given the dry conditions in much of the heartland this year. Strong sales both in the U.S. and abroad contributed to a very strong quarter for Monsanto, with early planting helping the company reach a 17% increase in revenue.

One interesting controversy involving Monsanto, though, has arisen. A coalition of farmers and other related agricultural players, including canning giant Ball (NYSE: BLL), has argued that Dow's and Monsanto's products are hurting crops on neighboring farms. It's unclear whether Monsanto might actually be liable for damage, but the issue isn't likely to go away soon.

For retirees and other conservative investors, a stock trading at 23 times earnings is no bargain, and a 1.4% dividend yield isn't all that special either. Most investors would be well advised to wait for a pullback in the shares before adding Monsanto to their retirement portfolios.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.