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.

Around the world, transportation by train has made a huge comeback in recent years, as skyrocketing fuel prices have highlighted the energy-efficiency aspects of rail transport. But more recently, slowdowns in resource-hungry economies around the world have led to lower volumes, and in Canada, Canadian National Railway has seen the impact of economic uncertainty. Will economic growth run the rails again? Below, we'll revisit how Canadian National Railway 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 Canadian National Railway.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$39.6 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

0.38

Pass

 

Worst loss in past five years no greater than 20%

(21.4%)

Fail

Valuation

Normalized P/E < 18

19.45

Fail

Dividends

Current yield > 2%

1.7%

Fail

 

5-year dividend growth > 10%

12.8%

Pass

 

Streak of dividend increases >= 10 years

16 years

Pass

 

Payout ratio < 75%

23.9%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Canadian National Railway last year, the company has kept its six-point score. But the stock has done a lot better, rising about 15% over the past year.

Canadian National has an impressive rail network that extends to three coasts: the Pacific, the Atlantic, and the Gulf of Mexico. That opens up many opportunities for business, but Canadian National's best decision comes from what it doesn't do a lot of: transporting coal. Unlike CSX and Norfolk Southern , which get nearly a third of their revenue from coal transport, Canadian National gets only about 7% of sales from coal. That has helped save the railway from the collapse in coal prices recently.

Rather than falling prey to the drop in coal, Canadian National has capitalized on another energy source: oil. Union Pacific owes much of its 15% jump in earnings during its most recent quarter to rising petroleum-product shipments, and Canadian National got 16% of its revenue in the first nine months of 2012 from petroleum and chemicals. With producer Continental Resources having to ship 65% of its Bakken oil production via rail, the slow pace of pipeline construction makes railroads a viable alternative.

For retirees and other conservative investors, the big question for Canadian National is whether rival Canadian Pacific will succeed with its cost-cutting measures. Despite impressive stock gains from Canadian Pacific's turnaround, Canadian National offers cheaper valuations, a better yield, and more dividend growth than its peer. Those looking for coal-free railroad exposure should look closely at Canadian National as a retirement-portfolio prospect.

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.

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The article Will Canadian National Railway 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. Motley Fool newsletter services recommend Canadian National Railway. 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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