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.
During the 1990s, Microsoft Corporation (NASDAQ:MSFT) put thousands of workers in position to retire at will, with a massive run-up in its stock that made millionaires out of even some rank-and-file employees. But lately, Microsoft Corporation (NASDAQ:MSFT) has been stuck in a mature-company rut. Can the company reignite its growth engine once more? Let’s revisit how Microsoft Corporation (NASDAQ:MSFT) 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:
1). 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.
2). 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.
3). 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.
4). 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.
5). 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 Microsoft Corporation (NASDAQ:MSFT).
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $231 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 | 4 years | Pass | |
| Stock stability | Beta < 0.9 | 0.97 | Fail |
| Worst loss in past five years no greater than 20% | (44.4%) | Fail | |
| Valuation | Normalized P/E < 18 | 14.44 | Pass |
| Dividends | Current yield > 2% | 3.3% | Pass |
| 5-year dividend growth > 10% | 15.4% | Pass | |
| Streak of dividend increases >= 10 years | 10 years* | Pass | |
| Payout ratio < 75% | 45.1% | Pass | |
| Total score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
*Based on fiscal years.
Since we looked at Microsoft last year, the company has picked up a point, thanks to counting its fiscal-year dividend increases. The shares, however, haven’t done nearly as well, dropping about 10% over the past year.
