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.

Despite its name, Bank of New York Mellon isn't your typical Wall Street bank. Rather than trying to make money on deposits and loans, BNY Mellon is a giant in providing financial services largely to institutional investors, including custodial services to for-profit business entities as well as foundations, endowments, and public retirement funds. It also manages assets, offering mutual funds to individuals and institutions as well as high-end wealth management for high-net-worth families. Below, we'll revisit how Bank of New York Mellon 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 Bank of New York Mellon.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$29.7 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

3 years

Fail

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

0.89

Pass

 

Worst loss in past five years no greater than 20%

(40.4%)

Fail

Valuation

Normalized P/E < 18

13.61

Pass

Dividends

Current yield > 2%

2%

Pass

 

5-year dividend growth > 10%

(11.1%)

Fail

 

Streak of dividend increases >= 10 years

0 years

Fail

 

Payout ratio < 75%

27.3%

Pass

       
 

Total score

 

5 out of 10

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

Since we looked at Bank of New York Mellon last year, the company's score has dropped by a point, with falling revenue proving the culprit. But the stock has done quite well in a favorable climate for financial stocks overall, as shares have risen 25% over the past year.

Despite BNY Mellon's strong returns in 2012, comparing the bank with Citigroup or Bank of America will give you the sense that BNY Mellon is lagging behind its peers. Yet when you pull back and take a five-year view of the stocks, it's easy to see that BNY Mellon didn't fall nearly as far as its fellow banks, since it didn't have the huge mortgage businesses that caused so much trouble for Citi and B of A.

That doesn't mean BNY Mellon is insulated from all of the banking industry's woes. In general, since other banks make up many of BNY Mellon's clients, it does better when banks generally are doing well. That explains why it made Global Finance's list of World's Safest Banks, alongside fellow custodial and financial services giant Northern Trust . It also justifies Berkshire Hathaway's confidence in the stock, with the Oracle of Omaha having multiplied its position in the bank tenfold between the end of 2011 and Sept. 30 of this year.

For retirees and other conservative investors, BNY Mellon's 2% yield is at the low end of the ideal, and it hasn't taken huge steps to restore its payout to pre-crisis levels even after having repaid its TARP obligations. Although flagging growth is also a concern, BNY Mellon's unusual exposure to financials make it a potential diversifier for portfolios rich in more traditional banks.

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.

This short article can't give you the full story on BNY Mellon's excellence, but we have exactly what you need to learn more about the company. Find out whether a new regulatory environment could make this banker's bank a buy right now by checking out The Motley Fool's new premium research report on BNY Mellon. Click here now to claim your copy, and receive a full free year of key updates and guidance as news develops.

Add Bank of New York Mellon to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

The article Will Bank of New York Mellon Help You Retire Rich? originally appeared on Fool.com.

Fool contributor Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of Bank of America, Berkshire Hathaway, and Citigroup. Motley Fool newsletter services recommend Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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