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.
More than perhaps any other company, Southwest Airlines
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 Southwest Airlines.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$6.8 billion||Fail|
|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||1.07||Fail|
|Worst loss in past five years no greater than 20%||(33.9%)||Fail|
|Valuation||Normalized P/E < 18||17.87||Pass|
|Dividends||Current yield > 2%||0.4%||Fail|
|5-year dividend growth > 10%||5.5%||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||5.3%||Pass|
|Total score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Southwest Airlines last year, the company hasn't improved on its three-point performance. Although the stock has gained about 15% over the past year, it still languishes in the single digits, well below its levels going back several years.
Southwest is well known for its customer service and the unique experience it offers passengers. But beneath the surface, Southwest's operations make a huge difference in contributing to profitability. For instance, the company has one of the most fuel-efficient fleets in the business, far exceeding Delta Air Lines
Those factors are more important than you might think. Lately, airlines in general have done well, but most of them have relied on a big jump in fee revenue to boost their bottom lines. Meanwhile, consolidation in the industry continues to take hold, reducing competition and making it easier for airlines to keep their fares high.
An interesting possibility for future growth at Southwest is in long-haul flights. With Southwest having ordered 150 new 737 MAX planes from Boeing
For retirees and other conservative investors, Southwest is no longer the hugely attractive play it once was. In an industry that seems never to emerge from the factors that hold back permanent growth, Southwest may be the best of a bad lot, but that doesn't mean it belongs in your portfolio.
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. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. 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.