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.

Until recently, retirees had relied on financial stocks for decades because of their stable income and solid fundamentals. But the U.S. housing bust and financial crisis changed all that, as banking stalwarts were shaken to the core by huge asset writedowns and the need for massive bailouts. In Canada, though, Bank of Montreal and its compatriot banks got through the crisis in much better shape, as Canada's housing market hadn't bubbled up to nearly the same extent. Five years later, though, are Canadian banks still a smart play? Below, we'll revisit how Bank of Montreal 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 Montreal.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$40.8 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

0.75

Pass

 

Worst loss in past five years no greater than 20%

(52.8%)

Fail

Valuation

Normalized P/E < 18

12.59

Pass

Dividends

Current yield > 2%

4.7%

Pass

 

5-year dividend growth > 10%

0.8%

Fail

 

Streak of dividend increases >= 10 years

1 year

Fail

 

Payout ratio < 75%

34.5%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Bank of Montreal last year, the company has kept its six-point score. The stock has delivered modestly good performance, rising about 10% over the past year.

Bank of Montreal has enjoyed the favorable environment that Canadian banks generally have experienced in 2012. With earnings up more than 6% year over year and income from its Capital Markets division more than doubling, Bank of Montreal certainly isn't complaining about Canada's financial health.

But even as U.S. households have deleveraged by getting debt off their personal balance sheets, Canadians have gone the opposite way. With the average Canadian consumer carrying debt levels of 163% of their income, both Moody's and Fitch Ratings have noted the trend as troublesome for Canadian banks, and Moody's came out with downgrades of Bank of Montreal as well as competitors Royal Bank of Canada , Toronto-Dominion , and Bank of Nova Scotia .

One way Bank of Montreal has tried to expand its business is by looking south of the border. With its purchase of Marshall & Ilsley last year, the bank succeeded in boosting its net interest income and held its own against Toronto-Dominion's U.S. expansion.

For retirees and other conservative investors, Bank of Montreal has had a good run, and its current valuation still leaves room for growth. Although the Canadian economy may show signs of stress, having geographical diversification can be extremely valuable. If you're looking for exposure to financial stocks, it's worth looking north at Bank of Montreal and its relatively conservative stature.

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. 

Even retirees need stocks that will provide strong growth for their portfolios. To help you find them, Motley Fool co-founder David Gardner's Supernova service treks across the investing universe to unearth revolutionary stocks with disruptive potential. Take a tour with David as he shares his secrets for picking winning stocks; click here to get instant access right now.

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

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

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Bank of Nova Scotia. 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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