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 few weeks, I've looked at 15, shares and in this article I'm going to examine the five lowest-scoring shares so far: BT Group
First, 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):
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On paper, BT is the kind of company that ought to make a good retirement investment -- it has a powerful brand, strong market share, and an infrastructure that no one can duplicate and which competitors pay to use. Yet BT's decision to embark on a debt-fueled expansion binge in the 1990s has cost it dear in terms of earnings growth. And I do have some concerns that its current foray into television, BT Vision, could have the same effect. BT has spent 890 million pounds on rugby and football broadcasting rights so far this year, and considerable subscriber growth will be required for this to show a positive return. BT may be about to turn a corner and deliver meaningful growth -- but I wouldn't bet my pension on it.
A trio of miners
Investors may have been pleased when they heard that Anglo American's CEO, Cynthia Carroll, had resigned last week, but in reality, Carroll's departure will not necessarily solve the problems that have affected Anglo American. The company's biggest challenge -- and the only one it doesn't share with its peers BHP Billiton and Rio Tinto -- is its large South African platinum business. Although platinum is a core part of Anglo's heritage and it remains the world's largest producer, the platinum business has proved costly and troublesome. Finding a solution to this will be a key part of turning Anglo American around.
Fellow miner Xstrata has also polarized investors recently, with some feeling that the company was being sold to merger partner Glencore International on the cheap. However, I believe that the result of the merger could be an attractive company for retirement investors, providing a steady dividend income directly derived from commodities. I think Xstrata is more attractive than its lowly score of 15 suggests, but judging it as a retirement share, I had to penalize it for its lack of track record and inconsistent dividend history.
The final miner in this quintet is Fresnillo, a highly successful gold and silver miner in Mexico. However, a successful company doesn't necessarily make an attractive retirement share, and this was the problem with Fresnillo. Its aggressive expansion plans introduce an element of risk and volatility and mean that dividend yield is likely to remain extremely low. Fresnillo is more suited to growth investing than retirement investing -- and growth investors were cheered by the company's decision to approve a feasibility study into the $500 million San Julian project this week. This project could add 9.6 million ounces of silver and 40,000 ounces of gold per year to Fresnillo's output at full capacity.
Bricks and mortar?
The final member of this low-scoring bunch is the Irish cement group, CRH, with 15. While I have little doubt that its fortunes will eventually blossom again, I am not sure this will happen in the near future. My feeling is that there will be further downside for shareholders before things start to improve. CRH is having to do battle with contracting markets in several regions of the world. Negotiations to buy a stake in an Indian cement business recently collapsed, and CRH has reported shrinking profits across Europe and in Asia. The one bright spot for CRH could be the U.S.: Not only are there signs that the country's housing market is finally picking up, but the damage caused by Hurricane Sandy could also generate a boost in demand for the company's products.
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, whose dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of 2011 -- 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. I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.
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 Warren Buffett Loves " -- it's free.
Further investment opportunities:
Roland owns shares in Rio Tinto but does not own shares in any of the other 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.