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. Let's figure out what makes a great retirement-oriented stock, then examine whether Best Buy (NYS: BBY) has what we're looking for.

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 Best Buy.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $9.1 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 1.30 Fail
  Worst loss in past five years no greater than 20% (45.9%) Fail
Valuation Normalized P/E < 18 7.05 Pass
Dividends Current yield > 2% 2.6% Pass
  5-year dividend growth > 10% 13.4% Pass
  Streak of dividend increases >= 10 years 7 years Fail
  Payout ratio < 75% 18.8% Pass
       
  Total score   5 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With just five points, Best Buy isn't giving conservative investors everything they'd like to see from a stock. The company was a market darling for years, but now, online trends have put it in a tough spot.

Not so long ago, Best Buy was on top of the world. The company had outlasted its main rival, Circuit City, and hoped to take advantage of customers fleeing from the bankrupt retailer to add to its already dominant market share over smaller competitors such as hhgregg (NYS: HGG) and RadioShack (NYS: RSH) .

But Best Buy has suffered from competition from online retailers. It's too easy for shoppers to go into Best Buy stores and then buy more cheaply from Amazon.com (NAS: AMZN) . Moreover, companies like Apple (NAS: AAPL) and Electronic Arts (NAS: ERTS) have greatly developed their direct distribution channels, potentially making middleman retailers like Best Buy much less important -- and slamming its margins.

Still, Best Buy is doing its best to remain innovative. It recently entered a partnership with Ford (NYS: F) to distribute electric-car chargers, with Geek Squad support helping car owners with the logistics. Fellow Fool Travis Hoium suggests that solar panel installations could be next.

Retirees and other conservative investors must find Best Buy's growing dividend attractive. But with the company's entire business model in flux, you might prefer to see how things turn out before jumping into shares of the company.

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 Best Buy to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the 13 Steps to Investing Foolishly.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Apple, Ford, Best Buy, and RadioShack. Motley Fool newsletter services have recommended buying shares of Amazon.com, Ford, Apple, hhgregg, and Best Buy, as well as creating a bull call spread position on Apple. 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.

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