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 UK 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 British Sky Broadcasting Group (LSE: BSY.L), Tullow Oil (LSE: TLW.L), Antofagasta (LSE: ANTO.L), Compass Group (LSE: CPG.L) and Imperial Tobacco Group (LSE: IMT.L). Let's take a look at how each of them scored against my five key retirement share criteria:

Catering vs. big tobacco
The two top scorers in this group of five were catering outsourcing giant Compass Group, and the U.K.'s second-largest tobacco firm, Imperial Tobacco. I suspect that Compass is overlooked by many private investors, but a brief look at the figures suggests that it shouldn't be -- it is far larger than its two obvious peers in the FTSE 100, G4S and Serco, and is potentially much less politically sensitive. After all, outsourcing catering is far less contentious than outsourcing police or defense activities.

I was impressed by Compass, but there is no denying the ongoing appeal of big tobacco, from an investment perspective if not an ethical one. Imperial currently trades on a P/E of just 12.3, versus Compass' rating of 17.7. As a result, its yield is also superior, with Imperial's shares providing an income of 4.1% at present, against the 2.8% paid to Compass shareholders. That could make a big difference to your retirement income and although tobacco's prospects may one day be extinguished, I suspect that the global popularity of smoking will comfortably outlive all of us.

Not retirement shares?
BSkyB's rise to become a fixture in 10 million British households is highly impressive, but from a retirement perspective I am nervous about depending on a business that relies on fast-changing technology. It's a good business, but not one I will be adding to my retirement portfolio.

Scoring level with BSkyB on 18 points was Tullow Oil, an independent oil company that has managed the rare trick of sustaining its growth over two decades to become a FTSE 100 company. Tullow's track record of drilling success is one of the best in the business and this may well continue, but as a retirement share it is currently far too expensive -- its P/E of 31 gives it a dividend yield of just 0.8%.

The final share in this review is copper miner Antofagasta, a successful company but not one I would add to my retirement portfolio, thanks to its tendency to invest almost all of its fat profit margins in risky growth projects, resulting in a feeble 0.9% yield and uncertain prospects -- albeit with the potential for substantial future returns.

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 Dec. 31, 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 and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favorite U.K. blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

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