Is Yamana 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.

When most people think about conservative stocks for retirees, gold miners aren't the first companies that come to mind. But over the past 10 years, gold prices have skyrocketed, leading many investors to wonder whether they shouldn't put at least some of their savings into investments tied to the yellow metal. Yamana Gold (NYS: AUY) is one stock that offers not only exposure to gold but also a dividend payout. 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 Yamana Gold.

Factor

What We Want to See

Actual

Pass or Fail?

SizeMarket cap > $10 billion$11.3 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 years4 yearsPass
Stock stabilityBeta < 0.90.98Fail
 Worst loss in past five years no greater than 20%(41%)Fail
ValuationNormalized P/E < 1819.47Fail
DividendsCurrent yield > 2%1.3%Fail
 5-year dividend growth > 10%67%Pass
 Streak of dividend increases >= 10 years2 yearsFail
 Payout ratio < 75%14.9%Pass
    
 Total score 5 out of 10

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

With only 5 points, Yamana Gold clearly doesn't look like the prototypical retirement stock. But with solid growth and a modest but increasing dividend, the gold miner is worth a closer look.

Yamana has mines throughout Latin America, with a particularly strong presence in Brazil. Thanks to substantial amounts of byproduct metals like copper, Yamana has incredibly low net cash costs for gold production of below $100 per ounce. That blows away competitors like Barrick Gold (NYS: ABX) and Goldcorp (NYS: GG) , despite their own fairly low cash costs. Yamana's Chapada mine in Brazil actually had a negative net cash cost after considering the value of copper and other byproducts.

With metals prices still at high levels, Yamana has reaped the benefits through higher profits, and it's now turning around and paying more of that money out to shareholders. Although the company hasn't directly tied its payout to metals prices, as Hecla Mining (NYS: HL) and Newmont Mining (NYS: NEM) have recently, Yamana was an early mover in the trend that peers like Eldorado Gold (NYS: EGO) have followed to raise their dividends.

In 2011, many miners' stocks lagged despite the advance in gold prices. But Yamana stood out, in part because of what Fool mining expert Christopher Barker noted as an "enormous valuation gap" that existed last year.

For retirees and other conservative investors, having some exposure to gold can help round out your portfolio. After the recent share move, Yamana's stock isn't as cheap as it used to be. But if you want some of the protection and diversification that precious metals investments provide, then Yamana's not a bad place to start your research.

If you like gold, there's another stock you should also look at. Read The Motley Fool's latest special report on gold to find out the tiny gold stock digging up massive profits. It's free but available for only a limited time.

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

At the time this article was published 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."Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. 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 Fool has adisclosure policy.

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

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