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 (UKX) 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 last week or so, I've looked at RSA Insurance Group (LSE: RSA.L  ) , Morrison (Wm) Supermarkets (LSE: MRW.L  ) , Centrica (LSE: CAN.L  ) , Hargreaves Lansdown (LSE: HL.L  ) and Rolls-Royce Holdings (LSE: RR.L  ) . Let's take a look at how each of them scored against my five key retirement share criteria:

Criteria

RSA Insurance

Morrisons

Centrica

Hargreaves
Lansdown

Rolls-Royce

Longevity 4/5 4/5 3/5 3/5 5/5
Performance vs. FTSE 3/5 3/5 4/5 4/5 5/5
Financial strength 4/5 4/5 4/5 5/5 4/5
EPS growth 2/5 3/5 4/5 4/5 3/5
Dividend growth 5/5 4/5 4/5 4/5 4/5
Total 18/25 18/25 19/25 20/25 21/25

Six-bagging decade
Top scorer Rolls-Royce is a company that's on a high at the moment. Its share price has risen by 632% over the last ten years, and shareholders wise enough to buy in 2002 and keep hold of their shares will have enjoyed a stunning 14% dividend yield on cost last year. Its core aero engine business is benefiting from the expansion of the global airline industry, while its energy and marine businesses is benefiting from the current boom in oil and gas exploration.

My only reservation for new investors is that Rolls-Royce is beginning to look a little expensive; it currently trades at a price-to-earnings ratio of 18, above its five-year average of 13.7 and above the current FTSE 100 average of 16. I would prefer to buy Rolls-Royce shares when they are going through a bad patch.

The also-rans
The other four companies featured in this roundup are all attractive businesses for investors, although each has its good and bad points. Hargreaves Lansdown has been a tremendous success story, and investors have been wowed by its high profit margins and growth potential. Hargreaves' share price is up 51% so far this year, leaving the shares trading on a whopping P/E of 26 -- yet despite this, its forecast dividend yield is a very respectable 3.9%.

On the downside, I believe Hargreaves has benefited from the volatile market conditions of the last few years, as much of its income comes from trading activity. This may not be sustainable in the longer term.

Investing in Centrica provides you with direct exposure to both the U.K. utility market and to oil and gas exploration and production, thanks to its position as an integrated energy company. It offers an attractive forecast yield of 4.9% and I think it is an attractive share for a retirement portfolio, with good long-term stability and income potential.

Morrisons and RSA both scored 18 out of 25 points, but the two companies could hardly be more different. RSA shares currently yield 7.6%, a normally unsustainable level that suggests that the insurance company's share price will have to rise or the dividend will have to be cut. I think that a share price rise is more likely, but it may take another couple of years -- or until the eurozone crisis reaches some kind of resolution.

The U.K.'s fourth-largest supermarket chain, Morrisons, is a well-run business, but I'm not a big fan, preferring Tesco or Sainsbury for my retirement portfolio. Morrison's lack of online progress concerns me and my fear is that in the long term, it may struggle to maintain its identity and could cease to have any competitive advantages over its three larger competitors.

An expert tip
Although doing your own research is important, 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 20 billion pounds of private investors' money -- more than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% over the 15 years ended Dec. 31, 2011.

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.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

Roland owns shares in Tesco but does not own any of the other shares mentioned in this article. The Motley Fool owns shares in Hargreaves Lansdown. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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