Are These the Five Worst Retirement Shares in the FTSE?

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 few weeks, I've looked at fifteen shares, and in this article I'm going to examine the five lowest-scoring shares so far -- Aviva (LSE: AV.L), Barclays (LSE: BARC.L), Marks & Spencer (LSE: MKS.L), Diageo (LSE: DGE.L), and Morrison (Wm) Supermarkets (LSE: MRW.L).

First, let's take a look at how each of them scored against my five key retirement share criteria:

Warning signs
Aviva's 7.9% dividend yield is more than twice the FTSE 100 average of 3.2%. That's a clear warning that some extra risk -- real or perceived -- applies to the insurance company's shares. In this case, the risk is twofold; Aviva's capital strength could be badly damaged if the eurozone crisis gets worse, and the company itself is in the midst of yet another reorganization in an effort to refocus the company on profitable areas where it can deliver growth.

All of this means that Aviva is a value or recovery investment. It offers long-term investors the potential to lock in a very attractive dividend income, with the risk, of course, that Aviva won't succeed in restoring its fortunes and may suffer further downside. I believe in the upside for Aviva and hold it in my own retirement portfolio, but only time will tell if this judgment is right!

Another company displaying warnings signs to investors is Barclays, which has been under a cloud recently following its exposure in the LIBOR rate-fixing scandal. This did not help the bank's reputation for being a sharp operator, but whether it is actually any worse in this regard than most of the other major U.K. banks is a different question -- possibly not. For new investors seeking to add a bank share to their retirement portfolios, Barclays has a lot of potential. Its valuation is lower than at almost any point since the credit crisis struck in 2007, yet it remains profitable and pays a dividend, with a current yield of 2.7%. For investors who were invested in Barclays before the crash and still hold the bank's shares, I would be tempted to top up my holding and average down. In the long term, this should help deliver a reasonable yield and reduce capital losses.

Retail therapy?
Two of the remaining three shares are big U.K. retailers -- Marks & Spencer and Morrison -- that both face headwinds, in my opinion. Marks & Spencer's high street presence and legendary brand means that it should be able to maintain its place in our shopping routines, but recent years have seen its clothing offering lose direction and fall out of favor with shoppers. M&S recently replaced the director in charge of general merchandise and hired a new style director -- a former CEO of Debenhams -- in an attempt to reverse this decline.

Morrison's has done well over the last few years, but I can't help feeling concerned about the security of its position as the U.K.'s fourth-largest supermarket chain. Unlike its three larger competitors, it doesn't have an online shopping business and its stores, which are popular and highly rated for fresh produce, may well see these advantages evaporate in the face of newly-revamped efforts from Tesco and Sainsbury. Online grocery retailing is growing faster than in-store shopping, to the extent that Tesco announced yesterday that it is opening more "dark stores" -- which only service home deliveries -- to meet growing demand.

Mine's a double
Of all the shares listed in this article, the one I have most confidence in is drinks giant Diageo. Although it is not a top scorer, I have absolutely no doubt it will remain a successful company for the foreseeable future, thanks to its portfolio of popular spirit brands and its global presence. As a retirement share, I think it has strong potential, but its relatively high price and low yield means it is better suited to investors who are seeking a future income, rather than an immediate one.

Learn from the best
Doing your own research is important, but another good 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 had 20 billion pounds of private investors' funds under management at the end of 2011 -- more than any other City manager.

Mr. Woodford's track record is truly outstanding. His dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 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. 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.

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:

• Ten Steps to Making a Million in the Market
• Top Sectors of 2012
• Here's How I Hope to Retire