Are These the 5 Best Retirement Shares in the FTSE 100?

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 things will improve 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 to protect yourself from the downturn, however, is to build 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 this article I'm going to introduce the five top-scoring shares so far and see how they compare. They are Unilever (NYSE: UL), Tesco (LSE: TSCO.L), Royal Dutch Shell (NYSE: RDS-B), SABMiller (LSE: SAB.L), and British American Tobacco (NYSE: BTI).

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

Cash machines
I own shares in three out of five of these companies, and one of the things that attracted me to all of them was their ability to generate a lot of free cash. The other factor several of these companies have in common is their strong growth in emerging markets. BAT's 32% average operating margin over the last five year is funded partially, if not largely, by growth in emerging markets, where buyers will pay a premium for BAT's western brands.

Although BAT might suffer the occasional antismoking legislation defeat, as it did in Australia recently, this is the exception, rather than the rule. On the whole, the tax revenue generated by BAT's products and the company's formidable lobbying power means there is little danger that governments in emerging markets will adopt antismoking legislation in the foreseeable future. Combine this with the widespread ignorance of the dangers of smoking in such countries, and you have a recipe for substantial further growth over the next decade or two -- however ethically disagreeable this might be for some investors.

Brewer SABMiller and consumer goods giant Unilever have a similarly dominant position in many emerging markets. Growing affluence and Western cultural influences mean that demand for their branded products is growing, and they have both proven themselves adept at understanding how to use economies of scale to grow profits while localizing their products successfully to match customers' requirements.

Like BAT, both SABMiller and Unilever own portfolios of brands that are recognizable to consumers all over the world. The pricing and marketing power this gives these companies should not be underestimated; brands are a vital element of consumer products, and there is a good reason big corporations will pay so much to acquire these intangible assets from their competitors.

Tesco's five-year average operating margin is only 5% -- just one-sixth of the average operating margin enjoyed by BAT and by far the lowest in this quintet. On the other hand, it remains the biggest U.K. supermarket by market share and can exert considerable pricing pressure on its suppliers. It also runs one of the biggest loyalty schemes in the U.K. (Clubcard), giving it access to a treasure trove of data that can be mined to understand, anticipate, and shape customers' spending habits. Tesco is also using its dominant market position to move into selling high-margin financial services through its subsidiary, Tesco Bank.

The final member of my top-scoring quintet is Shell, a share I own myself. Shell is the largest company in the FTSE 100 and one of the world's five largest integrated oil companies, otherwise known as "supermajors." Although its revenue and margins are heavily influenced by the price of oil, it does retain some control over pricing through its downstream operations -- retailing petroleum products such as petrol and diesel.

Shell's other major advantage over all but a handful of its competitors is its ability to take ownership of and execute the largest, most complex oil and gas development projects. This is increasingly necessary in order to access world-class resources, especially in the fast-growing global LNG market, where Shell is a major player.

Learn from the best
Doing your own research is important, but another good way to identify 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 had 20 billion pounds of private investors' funds under management at the end of 2011 -- more than any other City manager.

Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years -- a record few investors can even dream of. You can learn about all eight of Neil Woodford's top holdings and see how he generates such fantastic profits in this free Motley Fool report.

Buffett buy signal! The billionaire investor has found an attractive large cap right here in Britain! Discover what he bought and the price he paid in this special report -- "The One U.K. Share That Warren Buffett Loves" -- it's free.

Further investment opportunities:

• Ten Steps To Making A Million In The Market
• Top Sectors Of 2012
• Here's How I Hope To Retire