For those looking for some help along the way, quality large cap equities that pay out a strong and stable dividend are a worthwhile option. Investors can choose either to pocket the cash they get from their dividend and live off of it in retirement, or choose to reinvest it and grow their pot of money for a set time in the future. As with all equities, there are risks and investors may suffer significant losses along the way; however, FTSE 100 dividend-payers do tend to protect against the downside much more effectively than other areas of the market, giving investors a degree of protection.
While some investors prefer to leave their money in the capable hands of fund managers, more adventurous ones prefer stocks, due to the potential for greater returns, and cost advantages.
With this in mind, FE Trustnet asked The Share Centre’s Helal Miah to highlight five "retirement stocks" for investors to consider – namely, large cap defensive companies with an attractive, sustainable yield.
National Grid
"The dividend is attractive for income seekers with a prospective yield of around 5.5 per cent and dividend cover of 1.5 times," said Miah, in relation to British multinational electricity and gas utility company National Grid.
"The group’s new dividend policy states the dividend will grow in line with inflation from 2014. Management is also focused on improving the return on its US operations, with between £1.3bn and £1.4bn to be invested into the region following a positive start to the year."
Miah says the group has a strong balance sheet, underpinned by regulatory revenue, and the sector’s defensive nature is positive in the current economic climate.
"We have long been fans of National Grid and recommend investors drip-feed into the stock at these levels," he added.
National Grid has had a strong 10 years, returning almost 230 per cent to investors. This compares with 120.36 per cent from the wider FTSE 100 index.
Performance of stock and index over 10yrs
Source: FE Analytics
It has been a touch more volatile than the index over the period, though it has performed far better in falling markets, losing around 15 percentage points less than the FTSE in the horror year of 2008, and making more than 20 per cent in 2011. Over the same 12-month period, the index lost 2.18 per cent.
National Grid is a favourite with many UK Equity Income managers, appearing in the top-10 holdings of 10 of the 99 funds in the sector, according to FE Analytics data. Among its keenest admirers is FE Alpha Manager Francis Brooke, who holds it in his five-crown rated Trojan Income fund.
Royal Dutch Shell (B shares)
"We believe Royal Dutch Shell B shares should represent a core holding in an investor’s portfolio for their attractive yield of 5.3 per cent and a degree of stability," said Miah. "The dividend cover is currently 2.4 times."
"The company is going through some major capital investment programmes, which should lead to cost efficiency, increased production capacity and higher cash-flows. We recommend drip-feeding into the stock and any dip in the share price would represent a good buying opportunity."
Shell is even more popular than National Grid, appearing in the top-10 of more than 50 funds. The £6bn Artemis Income fund, run by Adrian Frost, has 3.5 per cent in the stock, making it his fourth-largest holding.
Performance of stock and index over 5yrs
Source: FE Analytics
Again the company tends to do better than the index when the market suffers a sudden fall, shown by its ability to make money in the aftermath of the Lehmans crisis in September 2008.
GlaxoSmithKline
No company is as popular with UK Equity Income fund managers as pharmaceutical giant GlaxoSmithKline, which sits in the top-10 of no less than 73 portfolios overall. Neil Woodford, one of the UK’s highest-profile managers, includes it as a top-10 position in his Invesco Perpetual Income and High Income funds.
Miah thinks it is the ideal retirement stock, because of its dependability.
"GlaxoSmithKline’s defensive nature and the competitive yield of 4.6 per cent make it a core holding for many portfolios," he explained.
"The hoped-for future improvement should be helped by new products, diversification and increasing exposure to emerging markets."
"GlaxoSmithKline is less prone to generic competition and patent expiration than some other pharmaceuticals and is confident of its late-stage pipeline coming out of its R&D programmes."
"We recommend GlaxoSmithKline for investors for stability in a portfolio and it should appeal to low risk and balanced investors looking for income."
"The yield is covered 1.3 times," he added.
Performance of stock and index over 3yrs
Source: FE Analytics
The stock has had a great run of late and its price-to-earnings [P/E] ratio, which is used by analysts to measure how expensive a stock is deemed to be, has increased as a result. However, Miah believes it still offers investors good value.
Centrica
Miah likes utilities company Centrica for similar reasons to National Grid.
"Centrica is attractive for defensive income seekers, with the potential for some growth," he said. "The attractive yield of 4.2 per cent is covered 1.5 times. A share buy-back of £500m was announced in February and there is the potential for this scheme to be extended next year."
"Centrica continues to improve its own supply lines of gas, making it less vulnerable to movements in the price of the commodity. This could also benefit if the UK decides to use gas to shore up its medium- to long-term potential energy shortage."
"Going forward, the group intends to focus on gas and growing its North American operations and aims to double profits in the region over the next three to five years."
Twenty UK Equity Income funds, including Artemis Income, hold it in their top-10.
United Utilities
Miah points to another utilities company – United Utilities – as his final choice.
Its ability to grow its dividend, he says, makes it particularly attractive.
"As a result of price rises being linked to the retail price index, United Utilities is able to promise growing dividends by 2 percentage points above inflation until 2015," he explained.
"Its attractive yield of 5.1 per cent is covered 1.2 times and is attractive for income seekers."
"The group believes it is well positioned in the current regulatory period of 2010 to 2015, with its ongoing efficiency plans and comparatively low cost of group debt. This defensive sector geared to income stands out to investors in the current low interest-rate environment."
Only one UK Equity Income fund – M&G Charifund – holds United Utilities in its top-10.
