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 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 Travelers.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Size | Market cap > $10 billion | $30.6 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 | 0.67 | Pass |
| Worst loss in past five years no greater than 20% | (13.8%) | Pass | |
| Valuation | Normalized P/E < 18 | 15.97 | Pass |
| Dividends | Current yield > 2% | 2.3% | Pass |
| Five-year dividend growth > 10% | 9.6% | Fail | |
| Streak of dividend increases >= 10 years | 8 years | Fail | |
| Payout ratio < 75% | 28.1% | Pass | |
| Total score | 7 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Travelers last year, the company has regained the point it lost from 2011 to 2012, as its earnings rose and reduced its valuation multiple. The stock has soared over the past year, rising more than 40% in a much more favorable environment.
Throughout much of the past year, Travelers enjoyed a nice rebound from a horrible 2011, in which damage from Hurricane Irene hit the company hard. Through the first three quarters of 2012, losses were just a third of their corresponding levels in 2011, and Travelers was able to improve its premium pricing in response to the storm and thereby boost profits.
At first, investors expected Hurricane Sandy to end Travelers’ good 2012. But when the final results came in, they weren’t as bad for insurance companies as some had feared. The Allstate Corporation (NYSE:ALL), which was hit hardest by the storm, turned a substantial profit, even though analysts had expected a quarterly loss due to Sandy. For Travelers Companies Inc (NYSE:TRV)’s part, although profits got cut in half, the insurer beat estimates by a whopping $0.60 per share.
For retirees and other conservative investors, Travelers has managed to thrive despite the challenging environment of big losses and poor yields on its holdings of fixed-income investments. With a reasonable dividend yield that has been growing steadily in recent years, Travelers Companies Inc (NYSE:TRV) deserves a close look from investors seeking to add financial exposure 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.
The article Will Travelers Help You Retire Rich? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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