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 measurements to show what makes a great retirement-oriented stock.
Rags-to-riches stories get a lot of press, given the wealth they create for investors. But Nokia
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 Nokia.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$11.4 billion||Pass|
|Consistency||Revenue growth > 0% in at least four of five past years||2 years||Fail|
|Free cash flow growth > 0% in at least four of past five years||2 years||Fail|
|Stock stability||Beta < 0.9||0.89||Pass|
|Worst loss in past five years no greater than 20%||(58.8%)||Fail|
|Valuation||Normalized P/E < 18||NM||NM|
|Dividends||Current yield > 2%||8.5%||Pass|
|5-year dividend growth > 10%||(14.2%)||Fail|
|Streak of dividend increases >= 10 years||0 years||Fail|
|Payout ratio < 75%||NM||NM|
|Total score||3 out of 8|
Source: S&P Capital IQ. NM = not meaningful because of negative earnings. Total score = number of passes.
With only 3 points, Nokia doesn't give retirees and other conservative investors much of what they like to see in a stock. What appears to be a strong dividend actually results largely from the huge plunge in the company's shares recently, as prospects for the mobile giant have continued to dim.
In the mobile-device business, there've been big winners and big losers, without a whole lot of in-between. Just as former corporate-smartphone leader Research In Motion
Nokia's partnership with Microsoft
For retirees and other conservative investors, Nokia is an incredibly speculative value play right now. On its face, it's extremely inexpensive, with net cash making up more than half its market capitalization. But until the company demonstrates it can survive in a tough industry environment, it's far too risky for most retirement portfolios.
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.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Apple, Google, and Microsoft, as well as creating a bull call spread position on Apple and a synthetic covered call position on Microsoft. We Fools don't 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.