Here are some excellent choices in the search for the best FTSE-100 retirement shares, writes Roland Head of The Motley Fool UK.
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 UK 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.
In this article I'm going to examine the five top-scoring shares so far—Pearson (London: PSON), Associated British Foods (London: ABF), Meggitt (London: MGGT), Petrofac (London: PFC), and Johnson Matthey (London: JMAT).
First, let's take a look at how each of them scored against my five key retirement share criteria:
Pearson may be best known to investors as the owner of the Financial Times, but although the FT Group business is quite profitable, it only contributes around 12% of profits to Pearson's business—75% of profits come from its educational publishing business, with the remainder coming from the Penguin publishing business.
There's regular speculation that Pearson might sell the FT Group, but from an investor's point of view, its educational business and the success of the new joint venture between Penguin and Random House are more important.
As a retirement share, Pearson has performed well in the past, increasing its dividend every year for at least a decade, meaning that investors who bought ten years ago have seen their income almost double in that time.
I was quite impressed with engineer Meggitt's potential as a retirement share. It currently sits on a fairly modest price-to-earnings ratio (P/E) of 12.1 and offers a 2.7% dividend yield.
While this level of income is below the FTSE 100 average of 3.3%, the likelihood of regular dividend increases look high and the company's payout ratio of around 30% of earnings per share should ensure that the dividend remains sustainable without restricting capital investment.
The majority of Meggitt's revenue comes from the civil aerospace and defense sectors, with around 10% coming from the energy industry. I quite liked this broad mixture of exposure, which should enable the company to ride out down cycles in individual sectors without too much pain.