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 the companies I've covered so far on this page).
Today, I'm going to take a look at Land Securities Group (ISE: LAND.L) , the U.K.'s largest publicly-traded real estate investment trust (REIT).
Land Securities vs. FTSE 100
Let's start with a look at Land Securities performance against the FTSE 100 over the last 10 years:
10-Yr. Trailing Avg.
Source: Morningstar. (Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Considering the scale of the property crash in 2007/8, Land Securities' 10-year average trailing total return of 5.5% doesn't compare too badly to the 7.2% figure for the FTSE 100. The company has continued its recovery in 2012 -- its has delivered a total return of 29.5% so far this year, compared to 7.3% for the FTSE.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Land Securities shapes up:
6.1 bn pounds
3.2 bn pounds
5-Year Average Financials
Earnings per share (EPS) growth
Source: Morningstar, Digital Look, Land Securities Group. *As a REIT, Land Securities is required by law to pay a high proportion of its profits as dividends.
Here's how I've scored Land Securities on each of these criteria:
A respectable age with a timeless business model
Performance vs. FTSE
Even after the property crash, it's not far off the FTSE 100.
Fairly solid, with a loan-to-value ratio of 36%.
Earnings really suffered when the market crashed.
Dividends remain half of 2008 levels but are creeping up.
What I like about Land Securities and its FTSE 100 peer British Land is that the share price of both these REITs is roughly where it was in 2003, before the property boom really took off. Unfortunately, Land Securities' dividend payout remains below 2003 levels -- in the 2003/4 fiscal year, it paid out 37 pence per share to shareholders. Shareholders received 29 pence in 2011/12, and the company's dividend is currently growing at around 3%-4% per year, so it will take some years to reach the levels last seen a decade ago.
Land Securities currently trades at a discount of around 10% to its adjusted net asset value -- a key valuation metric for REITs. Property companies normally trade at a discount, and 10% is not especially large, suggesting that Land Securities is quite fully valued at present. However, the majority of its property portfolio is made up of high-end London offices and major retail parks on long leases, providing the company with a certain amount of protection from market downturns.
I think that a large, well-established REIT like British Land or Land Securities could make a useful contribution to a retirement fund portfolio. By law, REITs have to pay out a high proportion of their profits as dividends and these payouts should keep pace with inflation over the long term. Land Securities may look a little expensive at present, but overall, I think its score of 16/25 underestimates the value it could add to a retirement portfolio.
Top income picks
If you don't like the idea of depending on rental properties for your retirement income, then 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 manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 326% in the 15 years to June 2012.
The good news is that 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.
The article Is Land Securities the Ultimate Retirement Share? originally appeared on Fool.com.
Roland does not own shares in any of the companies mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.