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 Carnival (CCL 3.77%), Old Mutual (OML +0.00%), Smith & Nephew (SN 3.58%), Schroders (SDR +0.26%) and Burberry (BRBY +4.83%). Let's take a look at how each of them scored against my five key retirement share criteria (each criterion is scored out of a maximum of five):

Carnival
Cruise ship operator Carnival owns many of the most famous brands in the cruise industry, including Cunard, P&O Cruises, and American lines such as Holland America and Princess Cruises. Carnival operates 100 cruise ships that carry a collective 200,000 guests and 77,000 crew at any given time. This is a big business -- but I'm not sure it's a great retirement share. I have concerns about Carnival's lack of cash-generation, heavy reliance on debt, mediocre performance against the FTSE 100, and weak earnings growth. It also has a pretty short history, having only floated and begun its acquisition trail in 1987.

Smith & Nephew
Smith & Nephew makes artificial joints and operates in a number of other specialized medical-technology sectors, including advanced wound-management and trauma. Since I wrote my original review of the firm, it has announced the $782 million acquisition of Healthcare Biotherapeutics, a U.S. wound care business. On the face of it, this should help Smith & Nephew improve its foothold in the wound care market, but the deal was expensive: Smith & Nephew paid 4.1 times Healthcare's 2012 sales and does not expect the acquisition to be earnings-enhancing until 2014.

This acquisition doesn't change my conclusion on this firm: Smith & Nephew may be an interesting share for growth investors, but its low yield, relatively small size, and under-par growth mean that it isn't a retirement share for me.

Old Mutual
There's no doubt that the world will be a different place by the time most of us retire. Asia and Africa in particular are likely to experience continued growth, development, and political changes. I believe a good retirement portfolio needs some exposure to these two great continents, but while it's relatively easy to gain exposure to Asian markets via blue-chip FTSE shares, there are fewer opportunities for gaining exposure to Africa without venturing into the higher-risk world of small-cap commodity and investment stocks.

Old Mutual proves an exception to the rule. This 167-year-old FTSE 100 life insurance company has its roots in South Africa and is currently working hard to expand its business into other African countries. It also has stakes in joint ventures in China and India, providing it with an attractive level of exposure to the world's biggest developing economies. Alongside this, Old Mutual has mature businesses in the U.K. and U.S. I reckon this firm could be an excellent long-term addition to any retirement portfolio, especially if you aren't planning to retire for another 20 years or so.

Schroders
There's nothing especially unusual about Schroders -- except that it has been doing the same thing, successfully, for more than 200 years. Shares in fund manager Schroders aren't cheap, but they do represent decent value for the long term, in my opinion. Schroders has clients all over the world and manages assets and funds for both institutions and retail investors, providing an attractive level of diversity.

Schroders also has an excellent record of dividend growth that should compensate for its current below-average 2.4% dividend yield. If you are looking for a financial firm to add to your retirement portfolio, then Schroders definitely deserves a place on your short list.

Burberry
Burberry's growth in recent years has been spectacular, but it's worth remembering that it has been making fashionable clothes for the luxury market since 1856. This is not some brash newcomer that has gate-crashed its way into the FTSE 100. However, while it managed the highest score of these five companies with an impressive 22 out of 25, I wouldn't recommend buying it as a retirement share.

In my opinion, Burberry is far too expensive and is aggressively priced for future growth -- meaning that this is not the time to buy it for a long-term hold, in case a change in fashions leaves you with a shrunken holding, a poor yield, and little prospect of earnings growth. There are far more attractive retail shares for retirement investors, one of which I suggested in my original review.

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 Oct. 31, 2012, during which time the FTSE All-Share index managed a gain of only 125%. 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.