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.

When it comes to U.S. tobacco stocks, Altria (NYS: MO) is second to none. Despite having spun off its much larger international operations into Philip Morris International (NYS: PM) several years ago, Altria is still big enough to dwarf its domestic competitors, behind the strength of its Marlboro brand. Yet with regulators and other attacks on tobacco, can Altria keep thriving? Below, we'll revisit how Altria 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 Altria.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$68.1 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

0.44

Pass

 

Worst loss in past five years no greater than 20%

(27%)

Fail

Valuation

Normalized P/E < 18

14.90

Pass

Dividends

Current yield > 2%

5.3%

Pass

 

5-year dividend growth > 10%

10.3%*

Pass

 

Streak of dividend increases >= 10 years

44 years*

Pass

 

Payout ratio < 75%

85.6%

Fail

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. * After adjusting to reflect spun-off businesses. Total score = number of passes.

Since we looked at Altria last year, the company has held onto its seven-point score. The stock, however, has managed a nice gain of about 15%.

As a leading sin stock, Altria draws strong reactions from many investors. Many see the company as a great way to capitalize on a long history of lucrative dividend payouts and profitability, with its Marlboro brand enabling it to maintain huge profit margins compared to discount cigarette maker Vector Group (NYS: VGR) and other lesser-known brands. Others are uncomfortable investing in a company that sells products linked to severe health problems. Over the past decade, however, Altria has produced extremely high returns for shareholders, as various threats of litigation and huge potential jury verdicts have largely faded.

But Altria and its tobacco peers still have plenty to worry about, and more recently, those concerns have held stock prices down throughout the industry. Tobacco volume in the U.S. has fallen by about 4% per year, with fewer smokers smoking fewer cigarettes. Lower volume has been partly responsible for Altria and Reynolds American (NYS: RAI) laying off workers.

In addition, Altria faces regulatory challenges. Earlier this year, the FDA said it would require tobacco companies to disclose levels of dangerous chemicals. The CDC also came in with a big advertising campaign encouraging people to quit smoking. And although Reynolds American and Lorillard (NYS: LO) managed to have a proposed requirement struck down that would have forced U.S. tobacco makers to put graphic images on their cigarette packaging, Altria can expect to face similar challenges in the future.

For retirees and other conservative investors, Altria continues to look like a promising dividend stock, with high yields and consistent dividend growth. But as its payout ratio remains high, it signals the possibility of an end to its long streak of higher dividends if volume doesn't turn around in the near future.

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.

To learn more about the best-performing stock of the past 50 years, take a look at our new premium report on Altria. You'll get in-depth analysis of how the tobacco giant is fighting back against a decline in smoking and get our top analyst's view on whether Altria is still a buy today. Simply click here now for access.

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

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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