Is Silver Wheaton 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.

The explosive move in precious metals over the past decade has captured the attention of investors everywhere. With stocks having remained largely flat over the same timeframe, gold and silver's big gains have attracted quite a bit of interest. But while many look to traditional miners like Silvercorp Metals (NYS: SVM) and Taseko Mines (ASE: TGB) for precious-metals exposure, an interesting alternative involves making silver-streaming arrangements with miners. Silver Wheaton (NYS: SLW) has used this strategy to its advantage for years, but does the move in precious metals still have legs? Below, we'll look at how the company 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?

SizeMarket cap > $10 billion$11.8 billionPass
ConsistencyRevenue growth > 0% in at least four of five past years4 yearsPass
 Free cash flow growth > 0% in at least four of past five years3 yearsFail
Stock stabilityBeta < 0.91.71Fail
 Worst loss in past five years no greater than 20%(61.7%)Fail
ValuationNormalized P/E < 1831.17Fail
DividendsCurrent yield > 2%1.1%Fail
 5-year dividend growth > 10%NMNM
 Streak of dividend increases >= 10 years1 yearFail
 Payout ratio < 75%5.2%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.

With only three points, Silver Wheaton doesn't seem to offer conservative investors what they need in a stock. But despite its obvious volatility, the question remains whether the silver streamer might make a good diversifying investment that could theoretically help protect the rest of your assets.

Silver Wheaton's business differs from that of ordinary miners. Rather than mining its own metal, the company pays mining companies cash up front in exchange for the right to buy mined silver at fixed, low costs. That gives those miners much-needed financing, while Silver Wheaton benefits if prevailing silver prices rise. Silver Wheaton has several such deals with miners including Goldcorp (NYS: GG) , Barrick Gold (NYS: ABX) , and Primero Mining (NYS: PPP) , and shares have soared along with the price of silver bullion.

Recently, in fact, Silver Wheaton decided to join the growing crowd of precious-metals plays paying dividends. Hecla Mining (NYS: HL) and Newmont Mining explicitly tied their payouts to the prices of silver and gold respectively. Yet while Silver Wheaton's payout doesn't have that bullion-price link, the company has been generous, already tripling its quarterly dividend just since starting it earlier this year.

For retirees and other conservative investors, the issue is whether you can stand the extreme volatility that Silver Wheaton is likely to give you. The argument in favor, though, is that silver stands as a hedge against fiscal irresponsibility among national governments -- something that the current crisis in Europe showcases as a major risk. If you believe silver could protect you from a future financial meltdown, then adding Silver Wheaton to your retirement portfolio could act to balance out your other stocks.

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 Silver Wheaton 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. The Motley Fool owns shares of Primero Mining. 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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