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.

Few companies have anywhere near the reach that BHP Billiton (NYS: BHP) has over the natural resources market. With holdings in precious metals as well as industrial metals, along with energy sources ranging from oil and gas to coal, the company is a literal gold mine to anyone who needs products from the earth. But while demand from China helped put BHP where it is, slowing growth there could endanger the company's prospects going forward. How can the world's biggest mining company turn the tide? Below, we'll revisit how BHP Billiton 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 BHP Billiton.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $183 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 4 years Pass
Stock stability Beta < 0.9 0.72 Pass
  Worst loss in past five years no greater than 20% (38.6%) Fail
Valuation Normalized P/E < 18 9.34 Pass
Dividends Current yield > 2% 3.2% Pass
  5-year dividend growth > 10% 23.4% Pass
  Streak of dividend increases >= 10 years 10 years Pass
  Payout ratio < 75% 23.8% Pass
       
  Total score   9 out of 10

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

Since we looked at BHP Billiton last year, the company has jumped two points, leaving its share-price volatility as the only blemish on its record. But that volatility has reared its head again lately, with shares down about a quarter over the past year as doubts arise about emerging-market demand.

For years, BHP Billiton has shared the task of meeting China's gluttonous demand for iron ore with Rio Tinto (NYS: RIO) and Vale (NYS: VALE) . With seemingly unlimited growth potential, China's long-term needs for improved infrastructure and construction activity still represent a big part of global commodities demand. Yet now that Chinese growth is finally showing signs of at least slowing somewhat, all three miners have seen their stocks punished. The slowdown is also having an impact on the copper business, which hits both BHP Billiton and Freeport-McMoRan Copper & Gold (NYS: FCX) as well.

But BHP Billiton's energy assets give it a big advantage over its competitors. Its purchase of Fayetteville assets from Chesapeake Energy (NYS: CHK) as well as its outright takeover of Petrohawk last summer gave it not only a position in lucrative shale-gas areas but also experience that it will be able to use around the world in other promising unconventional energy plays.

One interesting development for BHP Billiton involves rising interest in liquefied natural gas projects. With its strategically important geographical position, the company is in an excellent position to deliver LNG to Asian markets -- if demand is there by the time export terminals come on line.

For retirees and other conservative investors, though, BHP Billiton's steadily rising dividend shows just how successful the natural resources business has been over the past decade. If the tide is turning, then the company may be in for a rough ride -- but BHP Billiton has weathered storms before, and it will do so again.

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.

If you really want to retire rich, no one stock will get the job done. Instead, you need to know how to prepare for your golden years. The Motley Fool's latest special report will give you all the details you need to get a smart investing plan going, plus it reveals three smart stocks for a rich retirement. But don't waste another minute -- click here and read it today.

Add BHP Billiton to My Watchlist , which will aggregate our Foolish analysis on it and all your other stocks.

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 Freeport-McMoRan Copper & Gold. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

What are Penny Stocks

The lucrative and dangerous world of penny stocks.

View Course »

Investing in Startups

The lucrative and risky world of startups.

View Course »

Add a Comment

*0 / 3000 Character Maximum