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 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 week or so, I've looked at BT Group (LSE: BT-A.L), National Grid (LSE: NG.L), Reckitt Benckiser Group (LSE: RB.L), Fresnillo (LSE: FRES.L) and Prudential (LSE: PRU.L). Let's take a look at how each of them scored against my five key retirement share criteria:

Consumer profits
Both of the top two scorers in this review make their money from selling lots of relatively cheap products to a large number of consumers -- insurance from Prudential and consumer goods from Reckitt. In both cases, they are boosting profitability and overall revenue by expanding into emerging markets, and in both cases they own powerful brands. The final element they have in common is that expansion does not require massive, risky capital investment, as it does for the other three companies.

It's impossible to invest actively for your retirement without considering the impact of emerging markets. They are emerging now, but in 10, 20 or 30 years -- when you may need your pension -- they will have emerged and will have large, affluent middle classes who demand all the same things we already take for granted. That's why I'm confident that both companies represent good long-term retirement investments.

It's good to talk
BT has come a long way from the days when all it wanted was for its customers to spend a bit more time talking on the telephone. It's now investing heavily in securing exclusive sports rights for its television channels, expanding fibre-based broadband access across the U.K.'s more populated areas and selling its telephone and broadband services to retail and wholesale customers.

All of this costs a great deal of money, and BT has struggled to generate the growth required to justify its debt levels. It may now be starting to turn things around, but I still prefer Vodafone.

Unseen but essential
The final two companies in this review both fall into the unseen but essential category. None of us ever has any direct dealings with Fresnillo's gold and silver mines or with National Grid, but we'd soon notice if they and their peers stopped doing their jobs.

I think that Fresnillo is an attractive company, but it might contain too much speculative risk to be a good retirement share, especially at its current price. National Grid, on the other hand, is far more attractive. Its regulated income and high dividend payout is exactly what the doctor ordered and should provide a reliable, stable income for decades to come. Big capital investment requirements and periodic pricing battles with its regulator mean that the dividend may be squeezed from time to time, but overall, I reckon it's a safe bet and its U.S. business provides an attractive level of diversity.

An expert tip
Although doing your own research is important, one 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' money under management at the end of January 2012 -- more than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% over the 15 years to the 31 December 2011.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of 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; 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:

• Here's How I Hope to Retire
• 10 Steps to Making a Million in the Market
• 8 Shares Held By Britain's Super Investor

Roland owns shares in Vodafone but does not own any of the other shares mentioned in this article.