Why Tesco shares could still be a top FTSE 100 retirement buy

Supermarket aisle with empty green trolley

Today, I'm looking at two FTSE 100 stocks which I believe can provide a reliable, long-term dividend income. They're the kind of low-risk stocks I might tuck away in my retirement portfolio.

My first choice is supermarket giant Tesco (LSE: TSCO). With a market share of about 27%, the UK's largest grocer has emerged out of the sector downturn smelling of roses, in my opinion.

The market seems to share this view. Tesco's share price has already risen by 21% this year, compared to a flat performance from the FTSE 100.

Perhaps, more importantly, I think the group's financial foundations are much stronger now than they were five years ago. So I'm much more positive on this stock as an investment, even though it's no longer obviously cheap.

A class act

Chief executive 'Drastic' Dave Lewis has made a series of changes that have cut costs, improved profit margins, and focused this business on its core activity -- selling food in the UK.

The recent acquisition of wholesaler Booker seems a sensible move to me, as it means the group will supply thousands of new convenience store and restaurant customers. This should be achieved without requiring much capital expenditure or new property lease commitments.

Net debt fell by £1.1bn to £2.6bn last year, and the group's dividend was reinstated at 3p per share.

Why I'd buy

Long-standing shareholders will point out that the current dividend is a lot less than the 14.8p per share paid in 2014. That's true. But the unfortunate reality is that the old dividend had become unaffordable.

Today's dividend is a different beast. The payout is expected to rise to 5.1p per share this year, a level that should be comfortably covered by free cash flow as well as earnings. Another big hike to 7.1p is expected in 2019/20. These expected payouts give forecast yields of 2% and 2.8%, respectively.

This may seem low, but I think these payouts provide a safe, sustainable base for long-term dividend growth. That's what I'm looking for in a retirement stock.

Top dog in a tough market

The sale of DIY chain Homebase to Australian group Wesfarmers appears to have left the UK retailer in a state of near-collapse.

According to press reports this week, 70% of Homebase stores are losing money. New owner Hilco bought the company for a pound and plans to close 42 stores over the next year, while negotiating rent reductions on others.

I suspect all of this is music to the ears of Kingfisher (LSE: KGF) boss Véronique Laury. Her company, which owns B&Q and Screwfix, is the undisputed market leader in the UK. Kingfisher also runs several DIY chains in France.

Big upside potential

Laury is halfway through an ambitious five-year plan to unify the product ranges sold across these companies, stripping out duplication and waste. If she's successful, these changes could add £500m to annual profits by 2020/21.

This plan isn't without risk, but the company has started from a position of strength, with no cash and profit margins twice those of Tesco. Cash generation has historically been a strong point for Kingfisher and this year's forecast payout of 11p should be covered twice by earnings.

This stock has fallen heavily this year and now looks cheap to me, trading on 11 times forecast earnings with a 4% yield.

If you don't fancy supermarket shares, Kingfisher could be a worthy alternative.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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