Are These the FTSE 100's 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 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).

Over the last week or so, I've looked at Babcock International (LSE: BAB.L  ) , Smiths (LSE: SMIN.L  ) , Johnson Matthey (LSE: JMAT.L  ) , Rexam (LSE: REX.L  ) , and Meggitt (LSE: MGGT.L  ) . Let's take a look at how each of them scored against my five key retirement share criteria (scores are out of a maximum of five):

Criterion

Smiths Group

Rexam

Babcock International

Meggitt

Johnson Matthey

Longevity

5

5

4

5

5

Performance vs. FTSE

3

3

4

4

4

Financial strength

3

4

4

4

4

EPS growth

4

3

4

3

4

Dividend growth

2

2

4

4

4

Total

17/25

17/25

20/25

20/25

21/25

770 years can't be wrong
The five companies in this roundup have been in business for a total of 770 years, demonstrating the value of investing in FTSE 100 companies to fund your retirement. These companies are unlikely to fail and have far greater powers of survival in tough conditions than smaller, younger companies.

Indeed, longevity is an important qualification for a retirement share, given that if you are 40 years old now, you may still need your portfolio to be producing an income in fifty years' time.

Longevity is also a sign that a business has been able to consistently adapt and evolve to changing circumstances. Two companies that have done that extremely well are Smiths and Rexam. Neither one bears much resemblance to its original business, but both are continuing to grow and prosper. While Smiths' diverse engineering operations may be harder to understand than Rexam's world-class drinks can business, both could be suitable as retirement shares, thanks to their sustainable earnings growth and defensive industries.

Contract defense
Babcock International is an engineer-turned-outsourcing-company that makes most of its money providing support services to the armed forces. Its growth from FTSE 250 mid cap to FTSE 100 member has been impressive, and the company has made sure long-term shareholders are rewarded with steady dividend growth. While growth may inevitably slow as Babcock becomes larger, I think its deep-rooted links with the Ministry of Defense and the current trend toward greater outsourcing could make it an attractive retirement share.

There is something of a defense theme to this week's roundup, as one of my final two companies, Meggitt, is also heavily involved in the defense industry, which accounts for about 40% of the firm's earnings. The remainder of Meggitt's income comes from civil aerospace (45%) and energy (9%), giving it a similar profile to Rolls-Royce but at a much lower P/E. Of course, the two companies cannot be compared directly, but Meggitt has a long track record, and while it has cut its dividend a few times over the last 20 years, it usually delivers a modest increase every year -- ideal for a retirement share.

Special chemistry
Overall top scorer Johnson Matthey delivered a very impressive 21 out of 25 thanks to strong scores in all categories. The chemicals company, which specializes in producing automotive catalytic converters and doing other clever things with platinum, has been extremely consistent over the years, especially when it comes to dividends.

In fact, Johnson Matthey has increased its dividend every year since at least 1993. For future retirees, reliable dividend increases are more important than high current yields, as continuous increases mean that your income will keep pace with inflation and that over time, your dividend yield on cost will grow to above-average levels.

An expert tip
Although doing your own research is important, one way to identify great dividend-paying shares is to study the choices of successful professional investors. Someone who really understands how to pick shares that deliver sustainable dividend growth is City is fund manager Neil Woodford, whose dividend stock picks outperformed the wider index by a staggering 305% over the 15 years to the end of 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. 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:

Roland does not own shares in any of the companies mentioned in this article. 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.


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