Will Yamana Gold Help You Retire Rich?

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 idea of having a gold miner in a retirement portfolio has gained traction in the past 10 years, as a big bull market in gold has supported much better returns for top gold stocks than for the stock market at large. Yamana Gold (AUY) stands out among gold miners because of its healthy dividend, but is it a smart buy right now? Below, we'll revisit how Yamana Gold 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 Yamana Gold.

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

Since we looked at Yamana Gold last year, its score has dropped by a point, as free cash flow sank from last year's levels. But the stock has actually held up extremely well in a generally terrible year for mining companies, with Yamana rising about 10% over the past year.

The secret to Yamana's success has been finding ways to keep growing even when its rivals are faltering. In its most recent quarter, it boosted production by 11% to a record level of more than 310,000 gold-equivalent ounces.

Yamana has faced some of the same headwinds that the entire industry has had to deal with. Rising costs have pushed up expenses extensively, especially when you consider that cash costs of production net of byproduct sales more than doubled from the previous year's quarter. Still, it is extremely competitive on cost, missing low-cost Eldorado Gold (EGO 3.65%) but besting most of its other industry peers.

One way the industry is responding to difficult conditions is through acquisitions, and Yamana had its share this year. With its purchase of Extorre Gold, Yamana has avoided some of the mistakes that Kinross Gold (KGC 0.74%) made in its overpriced buyout of its Tasiast project in Mauritania in 2010. Smart purchases will help the company grow to challenge larger rival Goldcorp (GG), which is likely to make a big buy of its own in the near future, and Barrick Gold (GOLD 0.15%), whose balance sheet is stretched a bit thin for it to contemplate buyout activity.

For retirees and other conservative investors, a 1.6% dividend yield doesn't seem like much, but for a gold miner, it's a rich payout. If you're willing to take on the risk of a gold stock in your retirement portfolio, then Yamana's a choice worth further consideration despite its somewhat high valuation.

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.

Add Yamana Gold to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.