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 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 Royal Bank of Scotland Group (LSE: RBS.L  ) , Lloyds Banking Group (LSE: LLOY.L  ) , Experian (LSE: EXPN.L  ) , Petrofac (LSE: PFC.L  ) , and Land Securities Group (LSE: LAND.L  ) . Let's take a look at how each of them scored against my five key retirement share criteria (each criterion has a maximum score of five):

Criterion

RBS

Lloyds

Land Securities

Experian

Petrofac

Longevity

5

5

4

3

3

Performance vs. FTSE

1

2

3

5

4

Financial strength

3

3

4

4

5

EPS growth

1

2

2

4

5

Dividend growth

1

1

3

4

4

Total (out of 25)

11

13

16

20

21

RBS & Lloyds
Britain's two bailed-out banks, Royal Bank of Scotland and Lloyds, continue to trade well below their tangible net asset value and, as such, are potential value investments. For investors, they offer the tantalizing prospect of a strong recovery followed by a return to dividend payments and reliable profits.

Yet the dividends haven't yet started, and when they do, they will initially be small. In addition, both banks face ongoing risks from regulatory changes, enhanced capital requirements, and costly scandals such as Payment Protection Insurance claims, for which the two banks have already paid out a combined 4.7 billion pounds.

For these reasons, I think neither RBS nor Lloyds qualifies as a good retirement share at this point in time, despite their attractions.

Land Securities
As the U.K.'s largest real-estate investment trust, or REIT, Land Securities offers investors the chance to enjoy a steady dividend income generated from some of the U.K.'s prime commercial real estate -- principally London offices and large, out-of-town retail parks. These properties have proved relatively resilient to the wider market downturn, and occupancy of Land Securities' portfolio has remained high, enabling it to deliver total returns only just below those of the FTSE 100 over the last decade.

The main attraction of investing in a REIT is income. By law, REITs are required to pay out most of their earnings as dividends, and this can make for attractive yields and a reliable income. In my review, I concluded that while Land Securities' yield of 3.6% suggests that it is quite fully valued at present, its long-term income potential could be a useful way of diversifying your retirement portfolio.

Experian
Experian is one of the biggest names in the credit check business, and it is working hard to expand both its geographical base and its range of services. Regular small acquisitions are helping with the former, while a move into valued-added consulting services is helping with the latter. As a potential retirement share, Experian looked good on a number of points: It's highly profitable, it has outperformed the index, and its expanding business should be both defensible and sustainable.

On the other hand, growth comes at a price, and Experian's price-to-earnings ratio of 21 means its shares aren't cheap and yield just 1.9% -- substantially below the 3.3% average for the FTSE 100. Given this, I would only consider Experian as a retirement share for investors who are many years away from retirement and are prepared to let the share's dividend yield gradually rise to a competitive level while building a stake in this attractive business.

Petrofac
Today's top scorer is oil services firm Petrofac, which has proved conclusively that the surest way to get rich in the oil and gas sector is to supply operational and engineering services to the speculators. After 31 years in business, it has almost 1 billion pounds in net cash, has delivered total returns 10 times greater than those of the FTSE 100 over the last five years, and has a record of strong dividend growth. At the same time, it trades at an attractive discount to its peer John Wood Group, making it my pick of the two.

There is a downside, however. Petrofac's fortunes depend to some extent on the price of oil remaining high; without this, some of Petrofac's customers would find that their projects were unviable and would be forced to scale back their exploration activity. Petrofac's dividend yield isn't that great, either -- although 2.3% is a better yield than that offered by many growth shares, it isn't really good enough for a retirement portfolio. The company's onshore engineering order book has also flatlined so far this year in a possible sign that its growth may be slowing.

Like Experian, I think Petrofac could be a good retirement share for the long-term but would recommend buying in stages to take advantage of any future price weakness.

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 High Income fund grew by 342% in the 15 years to June 2012, during which time the FTSE All-Share index managed a gain of only 125%. Thanks to his impressive track record, Woodford had 21 billion pounds of private investors' money under management at the end of October 2012 -- more than any other City manager.

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 click here to download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

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. Try any of our Foolish newsletter services free for 30 days.


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