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.

Electronic devices like smartphones and tablets have become ubiquitous accessories for tech-savvy consumers. But behind every device is a host of companies helping to make its components, and behind many of those component makers is Applied Materials (NAS: AMAT) , which builds the manufacturing equipment that helps produce those building blocks. Below, we'll look at how the company 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 Applied Materials.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $16.6 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 3 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 1.10 Fail
  Worst loss in past five years no greater than 20% (42.1%) Fail
Valuation Normalized P/E < 18 9.78 Pass
Dividends Current yield > 2% 2.5% Pass
  5-year dividend growth > 10% 13.4% Pass
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% 19.8% Pass
       
  Total score   6 out of 10

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

With a score of six, Applied Materials satisfies some of the needs of conservative investors without delivering on all of them. The company stands out from most of its peers by paying a healthy dividend, but the stock has given shareholders a less-than-smooth ride in recent years.

Applied Materials makes manufacturing equipment for semiconductors, flat panel displays, and the solar industry. It counts chip giants Intel (NAS: INTC) and Texas Instruments (NYS: TXN) among its customers, and with the chip space having rebounded dramatically from its swoon during the financial crisis, Applied Materials has gone along for the ride. It has Micron Technology (NAS: MU) and several solar companies as clients as well.

Despite facing serious competition from rivals Novellus Systems (NAS: NVLS) , KLA-Tencor, and Lam Research (NAS: LRCX) , Applied Materials is big enough to make strategic decisions that give it a competitive advantage. Its big purchase of Varian Semiconductor Equipment was a gutsy call on the next up-cycle for the chip market.

In addition, Applied Materials is pushing hard into flat panel displays, going up against specialist Universal Display (NAS: PANL) in the lucrative OLED market. Orders in that segment have risen dramatically from 2010 levels.

For retirees and other conservative investors, tech stocks often seem like a minefield. But with a reasonable valuation, good dividends, and reasonable prospects for growth going forward, Applied Materials might well be the right tech stock for your retirement portfolio.

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 Applied Materials 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 in this article. The Motley Fool owns shares of Intel and Texas Instruments and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and Universal Display, as well as creating a bull call spread position in Intel. 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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