Are These the Ultimate Retirement Shares?

LONDON -- 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).

In my first five reviews, I looked at SSE (LSE: SSE.L), HSBC Holdings (LSE: HSBA.L), Royal Dutch Shell (LSE: RDSB.L), BAE Systems (LSE: BA.L), and G4S (LSE: GFS.L). Let's take a look at how each of them scored against my five key retirement share criteria:

The highest score so far is 21/25 for Shell -- a company that is living proof that in the oil industry, size matters. Shell's ability to fund and execute the biggest, most complex projects has enabled it to deliver strong earnings growth over a long period. Its 140 billion pound market cap makes it the biggest company in the FTSE 100, and its credit rating is better than that of some European countries, ensuring that it is able to borrow money on very competitive terms. Although dividend growth has been inconsistent, Shell is a reliable payer and should prove a safe bet for the long term.

HSBC and BAE Systems both scored an identical 19/25. Each is a sound bet for a retirement share, but both have been affected by the global downturn and have lagged the FTSE in recent years, contributing to weaker scores for earnings and dividend growth. Despite this, I believe both are currently attractively priced and that their long histories and established market-leading positions mean that their long-term futures seem pretty safe.

I had high hopes for SSE and was surprised it didn't score better. As a big utility, its defensive nature has helped shield it from the recession, and its dividend record is excellent. The two factors that dragged down SSE's total score were the volatile nature of its earnings and its heavy debt load. Debt is a way of life for utilities and is generally safer than average, due to their regulated income and essential nature, but the combination of changing energy prices and high levels of infrastructure investment mean that profitability and earnings growth can't always be taken for granted.

Trailing in last place is G4S, a company that recently became a topic of conversation for all the wrong reasons. I don't think that its Olympic fiasco will impact the company's business seriously, but I do think that it may struggle to maintain its historic rate of earnings growth and to outperform the FTSE 100. Despite this, G4S has consistently increased its dividend each year, and its size and global reach -- much of its business now comes from emerging markets -- should help ensure it retains a strong market share.

Expert selections
One way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr. Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download "8 Shares Held by Britain's Super-Investor" today, as it is available for a limited time only.

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Further investment opportunities:

• Here's How I Hope to Retire
• This Buffett Technique Will Increase Your Dividends
• 8 Shares Held by Britain's Super-Investor