Forget the cash ISA! One FTSE 100 dividend stock I’d buy for my retirement

Couple relaxing on a beach in front of a sunset
Couple relaxing on a beach in front of a sunset

Finding stocks you can buy today and use to help fund your retirement isn’t easy. How do you know the business will even exist in 20 years’ time?

One approach is to look for so-called defensive companies. These are businesses that provide goods or services that are part of the fabric of everyday life. Demand doesn’t change much during a recession and customers are often very loyal.

Today I’m going to look at two companies which match this description, starting with FTSE 100 consumer goods giant Reckitt Benckiser Group (LSE: RB).

Focus on health and hygiene

Brands such as Dettol, Durex, Gaviscon and Nurofen give us a clue about Reckitt Benckiser’s strategy. Now known as RB, the firm’s focus is on health, hygiene and home products.

The group’s $17bn acquisition of infant nutrition firm Mead Johnson in 2017 added the Enfamil formula brand to RB’s portfolio. Chief executive Rakesh Kapoor expects this business to deliver long-term growth.

Net debt rocketed from under £2bn to nearly £11bn to help fund this deal. However, with annual free cash flow of about £2bn, this level of debt looks manageable to me. I’m confident borrowings should soon start to fall.

A buying opportunity?

RB’s share price has fallen by more than 20% from its June 2017 peak of £81. A series of problems have slowed profit growth and broker forecasts for 2018 earnings have been cut by 10% over the last year.

However, the outlook has remained stable since the summer. Because the shares have fallen faster than profit forecasts, the stock now looks cheaper relative to forecast earnings. RB now trades on a 2018 forecast price/earnings ratio of 19, with a prospective yield of 2.7%.

Although I’d prefer a dividend yield closer to 3%, I rate RB as a high quality business with good long-term prospects. I’d be happy to buy a few shares at this level and tuck them away for my retirement.

A small-cap alternative

One small-cap company that’s stood the test of time is agricultural feed and engineering firm Carr’s Group (LSE: CARR). This business was founded in 1831, since when it’s grown into a £142m business with operations in the UK, USA, Germany and New Zealand.

Carr’s shares are up by 5% at the time of writing after the company’s full-year results clocked in ahead of analysts’ forecasts again.

Sales rose by 16.5% to £403.2m during the year to 30 September, while pre-tax profit was 45% higher, at £16.6m. Adjusted after-tax earnings rose by 56.2% to 13.9p per share, beating forecasts of 12.7p per share.

Last year’s strong profit growth is said to be the result of “improved farmed incomes” in the UK and a “recovery in US cattle prices”. Trading at the group’s engineering businesses has also improved, especially in the oil and gas sector.

Buy on the dips

This small business doesn’t enjoy the high profit margins earned by RB. But the firm’s profits are fairly reliable and it has a strong balance sheet, with net debt of just £15.4m at the end of September. Cash generation is also good and the dividend has been consistently covered by free cash flow in recent years.

At the time of writing, Carr’s stock trades on a forecast P/E of about 13 with a dividend yield of 2.8%. I rate the shares as a buy and would seek to build a long-term position by buying during future market dips.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.