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.

Back in its heyday, Best Buy (NYS: BBY) represented a huge move forward in electronics retail. Compared to tiny record stores, the big-box retailer jam-packed with goodies had a nearly infinite selection. But with the rise of Internet retail, many shoppers treat Best Buy not as a potential purchase point but rather as a convenient way to see products in person that they fully intend to buy elsewhere. Can Best Buy change its showroom image, or is the company doomed to obsolescence? Below, we'll revisit how Best Buy 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 Best Buy.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $5.9 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 2 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 4.73 Pass
Dividends Current yield > 2% 3.7% Pass
  5-year dividend growth > 10% (45.1%) Fail
  Streak of dividend increases >= 10 years 2 years Fail
  Payout ratio < 75% NM NM
       
  Total score   3 out of 9

Source: S&P Capital IQ. NM = not meaningful. Total score = number of passes.

Since we looked at Best Buy last year, the company has lost two points. But the stock is down almost 30% as the company has dealt with wave after wave of disturbing news.

The entire electronics industry has been in turmoil from the threat of Amazon.com (NAS: AMZN) and its stranglehold on Internet retail. Many believed that Circuit City's failure would represent final victory for Best Buy, but it hasn't turned out that way. Competitors Conn's and hhgregg (NYS: HGG) have resorted to emphasizing hard-to-deliver items like appliances, but that's a much smaller niche than Best Buy is used to inhabiting. Meanwhile, Barnes & Noble has slowly slid in light of Amazon's dominance in books, despite having had some success with its Nook tablet against Amazon's Kindle Fire.

For Best Buy, though, the real problem comes from a lack of direction. The company is trying to introduce smaller stores that mimic what RadioShack (NYS: RSH) has done. But given RadioShack's own problems, the strategy doesn't look particularly promising. Moreover, the departure of former CEO Brian Dunn amid allegations of an improper relationship served only to distract the company from its task of trying to recover.

Now, Best Buy is locked in a battle over ownership. After the Dunn scandal forced him to step down as board chairman, founder Richard Schulze has made bids to buy out the company for between $24 and $26 per share in cash, well above the current stock price. Bulls hope that Schulze can engineer the same kind of turnaround that Howard Schultz did at Starbucks (NAS: SBUX) in reversing a floundering business and giving it new direction. But the company has rebuffed the offer, naming a new CEO with a lucrative contract instead.

For retirees and other conservative investors, there's no good reason to count on Best Buy to escape its downward spiral. A turnaround is always possible, but for risk-averse retirement portfolios, Best Buy doesn't really make sense at this time.

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.

Unlike Best Buy, Amazon has some truly interesting opportunities. Find out all about them in our new premium report on Amazon. You'll get a year's worth of free updates from our top analysts, so don't wait -- get started today.

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

The article Will Best Buy Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Best Buy, RadioShack, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and hhgregg, as well as writing puts on Barnes & Noble. 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.


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