Is Royal Gold the Right Stock to Retire With?

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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.

Gold-related companies aren't the first thing investors think of when they're looking for a conservative retirement-oriented stock. But Royal Gold (NAS: RGLD) looks like a possible exception to the rule, with a history of modest but growing dividends and relatively stable share performance. But will gold's huge rise in the past decade come back to bite investors who buy shares now? Below, we'll look at how Royal Gold 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 Royal Gold.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$3.74 billion

Fail

Consistency

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

5 years

Pass

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

2 years

Fail

Stock stability

Beta < 0.9

0.40

Pass

Worst loss in past five years no greater than 20%

(14.4%)

Pass

Valuation

Normalized P/E < 18

51.33

Fail

Dividends

Current yield > 2%

0.7%

Fail

5-year dividend growth > 10%

14.9%

Pass

Streak of dividend increases >= 10 years

10 years

Pass

Payout ratio < 75%

31%

Pass

Total score

6 out of 10

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

Royal Gold scores six points, showing that it has quite a few of the attributes conservative investors like to see in a stock. Royal Gold may be a gold stock, but it's a lot different from many of the miners you're familiar with.

Royal Gold gives investors a remarkably diversified play on the gold market. Rather than mining gold itself, Royal Gold enters into royalty agreements with mining companies, providing liquidity to miners while reaping the long-term rewards of gold production and higher gold prices. The arrangement is quite similar to what Silver Wheaton (NYS: SLW) does with its silver-streaming business model.

Part of Royal Gold's success comes from the impressive list of properties it's managed to gather. Deals with Goldcorp (NYS: GG) and its Penasquito mine, as well as others including Barrick Gold (NYS: ABX) , Teck Resources (NYS: TCK) , and Thompson Creek Metals (NYS: TC) , have helped Royal Gold build up a dependable stream of cash flow that's poised to get even larger as long as metals prices remain high.

Retirees and other conservative investors may not be entirely comfortable with that caveat, though, especially as gold has come well off its summer highs. But as a counterbalance to other stocks, committing a small amount of capital to Royal Gold in a retirement portfolio gives you some exposure to the yellow metal that can help diversify your investments.

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.

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

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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 Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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