Are These the Ultimate Retirement Shares?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the U.K. large caps that have the potential to beat the FTSE 100 over the long term and support a lower-risk income-generating retirement fund (you can see all of the companies I've covered so far on this page).

Over the few weeks, I've looked at Wolseley (LSE: WOS), Standard Life (LSE: SL),Randgold Resources (LSE: RRS), Severn Trent (SVT -0.24%) and Apple (AAPL 0.10%).

Let's take a look at how each of them scored against my five key retirement share criteria:

Severn Trent
Water utility Severn Trent and its peers are privileged companies, operating with little meaningful competition, and a regulatory regime that provides a guaranteed return on investment, for which we, as customers, foot the bill. Whatever your view on the ethical merits of this situation, it has certainly provided an attractive dividend income for investors -- Severn Trent's shares currently yield 4.9%.

However, the current regulatory price control period for water utilities ends in 2014. A new set of price controls has yet to be agreed, but in a possible sign of things to come, water regulator OFWAT has already committed to allowing the utilities to continue to earn a return on capital that's linked to Retail Price Index (RPI) inflation. RPI is typically about 1% higher than Consumer Price Index (CPI) inflation, which is the government's preferred measure and is widely applied elsewhere in the economy. This decision suggests to me that the 2015-2020 water pricing controls won't be too different to the current controls.

Severn Trent is likely to remain an attractive income share, but it isn't cheap and there are higher yields elsewhere in the utility sector, one of which I discuss at the end of this article.

Wolseley
Plumbing and heating supplier Wolseley's share price has gained 26% in the last year alone, as the company's U.S. business has fueled a strong recovery. Wolseley's earnings in the U.S. and Canada accounted for 70% of trading profit in the first quarter of this year, highlighting the value of its transatlantic operations.

Wolseley's share price has risen by 140% since its 2009 lows, and while it no longer looks a bargain -- with a price-to-earnings (P/E) ratio of 14.5 and a dividend yield of 2.6% -- it doesn't look too expensive either, given that brokers are forecasting 18% earnings growth for the current year.

Although Wolseley's reliance on the North American and British construction markets makes it heavily cyclical, it could perform well as a retirement share over the long term, assuming its cyclical nature was offset by other shares that weren't likely to be affected by the same factors.

Standard Life
Standard Life is one of the U.K.'s oldest financial institutions, with a 180-year history as a mutual society. In 2006, it floated and became a FTSE 100 member, meaning that it only has a short track record as a public company. However, early signs are good and the firm's dividend history is particularly attractive. Standard Life currently offers a forward yield of 4.6% and has delivered average dividend growth of 8% per year over the last five years.

Like many financial shares, Standard Life's share price has risen sharply over the last year -- by 46% -- and it currently trades on a forward P/E of about 14. This isn't cheap, but I think its safety and long-term growth prospects probably justify the price -- and I suspect there will be a market dip at some point this year, which could provide an attractive buying opportunity for financial stocks.

Apple
Apple's products and marketing genius have made it America's biggest company (a title it periodically swaps with ExxonMobil). Yet it has fallen out of favor with investors over the last year, leaving its share price 25% lower than it was six months ago. Apple's current P/E of 10.6 looks very cheap, and its dividend yield of 2.3% isn't bad by American standards. However, for retirement investors, the real hope lies in the possibility that Apple will increase its dividend payouts to utilize more of its free cash flow, and perhaps some of its $137 billion cash pile.

Investors hoping that Apple's management will share some of its horde with the company's owners -- the shareholders -- got a boost yesterday when hedge fund magnate David Einhorn, whose company, Greenlight Capital, owns 0.1% of Apple, launched legal action against Apple to try and prevent it scrapping preferred stock, which he believes should be issued to shareholders as a method of increasing total payouts. I agree that Apple's cash pile is too large, and its reluctance to share the bounty with shareholders is the main reason I might be hesitant about adding it to my retirement portfolio.

Randgold Resources
Randgold is the U.K.'s largest listed gold producer, and one of the world's most successful mine exploration and development companies. It has 16.3 million ounces of attributable gold reserves, accumulated via a series of multimillion ounce discoveries in Africa over the last 17 years. Unlike many of its peers, Randgold has also transformed most of its discoveries into profitable mines, without becoming mired in debt or geopolitical problems.

As a result, Randgold's stock isn't cheap, and despite a 25% dividend increase last year, it still only offers a dividend yield of 0.7%. Clearly this company is not an income stock, but Randgold's share price has fallen by nearly 20% from its 2012 peak, so anyone seeking to trade shares for capital gains within a retirement portfolio might want to consider this well-managed firm. For me, retirement investing is all about income, but I do believe there is more to come from Randgold as it continues to increase production and make new discoveries.

2013's top income stock?
The utility sector is known for its reliable, above-average dividends, but the Motley Fool's team of analysts has identified one FTSE 100 utility share that they believe offers a particularly high-quality income opportunity.

The company in question offers a 5.7% dividend yield and the Fool's analysts believe that it could be worth up to 850 pence per share -- offering new investors a potential 20% gain on the current share price of around 700 pence.

Indeed, the Motley Fool's analysts are so confident in this share that they've named their report "The Motley Fool's Top Income Stock for 2013!" This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.

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