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.

Lots of promising stocks for a retirement portfolio are well-known companies that are household names around the nation. Illinois Tool Works (NYS: ITW) isn't one of them, but among its industrial products and equipment, the company has its hand in many things you are more familiar with. The company has quietly become a dividend powerhouse, but does that alone make it worth getting to know Illinois Tool Works better? 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 Illinois Tool Works.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $22.4 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 1 year Fail
Stock stability Beta < 0.9 1.15 Fail
  Worst loss in past five years no greater than 20% (32.7%) Fail
Valuation Normalized P/E < 18 14.53 Pass
Dividends Current yield > 2% 3.1% Pass
  5-year dividend growth > 10% 14.4% Pass
  Streak of dividend increases >= 10 years 48 years Pass
  Payout ratio < 75% 33.9% Pass
       
  Total score   7 out of 10

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

With a score of 7, Illinois Tool Works has a lot of what conservative investors want to see in the stocks they own. The company has raised its dividends every year for nearly half a century, and even though growth in free cash flow has been spotty recently, the stock trades at a reasonable valuation.

Illinois Tool Works makes a wide array of products. Its transportation segment, where it matches up against PACCAR (NAS: PCAR) , has the most revenue. But its power systems and electronics division, in which it competes with General Electric (NYS: GE) and Cooper Industries (NYS: CBE) , has the highest operating profits over the past 12 months. With everything from fasteners and coatings for vehicles to arc welding equipment, from refrigeration and food processing equipment to laminates for furniture and hand wipes, the company meets the needs of businesses both in the U.S. and around the world.

But what sets Illinois Tool Works apart from peers like Manitowoc (NYS: MTW) and Huntsman (NYS: HUN) is its acquisition strategy. Essentially, the company believes in spending most of its time focusing on the relatively small number of clients that produce the vast majority of its profits. Therefore, when it buys a company, it instills that refocusing philosophy on its people, which usually leads to a big boost in profit margins and cash flow.

Lately, though, the company has disappointed investors. In its most recent quarter, Illinois Tool Works announced analyst-beating earnings but gave disappointing forward earnings guidance. Yet for those willing to wait, the drop in the stock has provided what could be an excellent buying opportunity.

For retirees and other conservative investors, Illinois Tool Works has nearly a perfect combination of current income and future growth prospects. Although it's economically sensitive -- and the U.S. economy still hasn't convincingly gotten itself out of the woods just yet -- Illinois Tool Works is worth a closer look if you have a relatively long investment horizon for your money.

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 Illinois Tool Works 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. Motley Fool newsletter services have recommended buying shares of PACCAR and Illinois Tool Works. 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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