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.
Wall Street has been no friend to mainstream investors lately. Not only have too-big-to-fail banks taken billions from taxpayers, but they've also punished shareholders with big drops in their stocks. But while Bank of New York Mellon (NYS: BK) hasn't avoided the slide, it does have a leg up on some of its fellow Wall Street denizens, thanks to a successful market niche. 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 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 Bank of New York Mellon.
What We Want to See
Pass or Fail?
|Size||Market cap > $10 billion||$24.2 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||0.82||Pass|
|Worst loss in past five years no greater than 20%||(40.4%)||Fail|
|Valuation||Normalized P/E < 18||10.25||Pass|
|Dividends||Current yield > 2%||2.6%||Pass|
|5-year dividend growth > 10%||(13.1%)||Fail|
|Streak of dividend increases >= 10 years||1 year||Fail|
|Payout ratio < 75%||20.3%||Pass|
|Total score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With a score of 6, Bank of New York Mellon gives conservative investors a fair amount of what they want from a stock. Despite the same hiccup in dividends that most bank stocks suffered during the financial crisis, the company may benefit from increased regulatory scrutiny of the industry.
It's easy to point to the bad loans that banks like Wells Fargo (NYS: WFC) , Bank of America (NYS: BAC) , and Citigroup (NYS: C) made during the housing boom and blame them for all of Wall Street's troubles over the past several years. The housing bust and ensuing market meltdown raised a chorus of outraged voices proposing increased regulation.
But along with peers Northern Trust (NAS: NTRS) and State Street (NYS: STT) , Bank of New York Mellon is poised to profit from regulation. That's because it provides professional custodial services to other financial institutions, which outsource their regulatory and compliance responsibilities to focus more on their core banking and financial businesses. As those responsibilities become more onerous and complex, more banks turn to companies like BNY Mellon to take care of them.
Still, BNY Mellon has challenges. In a low-rate environment, the bank started charging some institutions for their large deposits, because the demand for places to stash cash while getting FDIC insurance greatly outpaced the returns BNY Mellon could earn on those deposits. US Bancorp (NYS: USB) follows a common practice in the industry, similarly passing on a portion of the FDIC fees it incurs on some of its products for small-business customers, irrespective of how much they have on deposit. Moreover, just today, BNY Mellon faced controversy as The Wall Street Journal reported some details about a state fraud case against the bank and what BNY Mellon allegedly did in response to the government investigation.
For retirees and other conservative investors, the good news is that BNY Mellon has started pushing its dividend back upward after its big cut during the financial crisis. If regulation is the wave of the future -- and there's no reason to think it isn't -- then BNY Mellon could be a smart way to invest in the financial sector going forward.
If you like traditional banks, though, we have some ideas there, too. Read The Motley Fool's latest special report on banking to find out which banks the smartest investors are buying now.
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.
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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 Bank of America, Wells Fargo, and Citigroup and has created a covered strangle position on Wells Fargo. We Fools don't 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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