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.

Silver mining has been a lucrative industry over the past decade, as silver prices have soared. Although Silver Wheaton isn't a silver miner, it has found an even more lucrative way to cash in on rising bullion prices, using its silver streaming model to finance mining companies and claim a share of their output. Over the past year, though, silver prices have been stuck below their all-time-record levels set just a couple years back. Can Silver Wheaton still grow? Below, we'll revisit how Silver Wheaton 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 Silver Wheaton.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$13 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

3 years

Fail

Stock stability

Beta < 0.9

1.86

Fail

 

Worst loss in past five years no greater than 20%

(61.7%)

Fail

Valuation

Normalized P/E < 18

37.65

Fail

Dividends

Current yield > 2%

0.8%

Fail

 

5-year dividend growth > 10%

NM

NM

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

23.7%

Pass

       
 

Total score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful; Silver Wheaton paid its first dividend in March 2011. Total score = number of passes.

Since we looked at Silver Wheaton last year, the company hasn't been able to improve on its three-point score. But the stock has done reasonably well, climbing about 20% over the past year.

Silver Wheaton has an ingenious business model. Rather than taking on all the risks of mining, the company provides capital to mining businesses. For instance, this year, the company completed a deal with HudBay Minerals to provide $750 million toward its Peruvian Constancia mine, receiving the rights to silver streams from that mine as well as silver and gold production from an existing Manitoban mine. Existing deals with Goldcorp and Barrick Gold have continued to pay off for the streaming company, despite bad news from both companies that could reduce production and have an impact on Silver Wheaton's streams from their mines.

Perhaps the most interesting thing about Silver Wheaton is that it has somehow maintained a moat against competition. Plenty of streaming companies have emerged on the gold mining side of the business, with Royal Gold and Sandstorm Gold having done some big deals yet still retaining capital for future opportunities. But silver remains Silver Wheaton's demesnes, and it dominates its niche.

Silver Wheaton is still susceptible to adverse bullion price moves. In its most recent quarter, production soared, but profits fell due to lower silver prices. Still, with plenty of prospects for a rebound in silver to come, Silver Wheaton has plenty of potential for appreciation.

For retirees and other conservative investors, Silver Wheaton certainly carries risk, and its dividend is relatively puny compared to other investments. But the company's unique exposure makes it arguably safer than owning traditional mining stocks, making Silver Wheaton worth a closer look even with its poor score on this scale.

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.

Learn more about Silver Wheaton in the Fool's in-depth analyst research report on the silver streamer. Inside, you'll get more in-depth analysis of the company as well as our opinions on whether Silver Wheaton is a buy right now. Get your copy of this report today; click here and be in the know.


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

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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