Are BAE Systems plc, Diageo plc and Imperial Brands plc the perfect retirement stocks?

When it comes to selecting retirement stocks, investors generally move away from high-risk, volatile options, and focus on building a portfolio of high quality blue chips.

A great retirement stock has characteristics such as a strong competitive advantage, a long-term revenue driver, a history of consistent increasing revenues and earnings and a healthy dividend that’s growing at a faster rate than inflation.   

Today I’m looking at three well-known FTSE 100 companies and examining whether I would classify them as perfect retirement stocks.

Defence is the best form of offence

While it might not be the most ethical investment, I believe defence company BAE Systems (LSE: BA) is a stock that could play a strong role in a retirement portfolio. With the current levels of geopolitical uncertainty worldwide, I believe governments will have no choice but to spend significantly on defence going forward. This could reward investors over the long term.

Earnings at BAE Systems have been a little weak over the last few years as defence budgets waned, but the trend now appears to be changing. City analysts have pencilled-in FY2016 basic EPS of 39p for the company, up from 29p for FY2015.

BAE Systems has a formidable dividend yield of 4.3% and with the stock trading on a PE ratio of 12.5 times next year’s earnings, the defence giant looks like a solid long-term investment to me.

Keep it simple

Drinks giant Diageo (LSE: DGE) is a classic retirement stock. If you prefer to invest like Warren Buffett and buy shares in companies you understand, Diageo is the perfect choice as it doesn’t get much simpler.

The owner of brands such as Johnnie Walker and Smirnoff sells its products all around the world with strong exposure to emerging markets. This should drive revenues forward for the foreseeable future, as desire for premium alcoholic products increases with rising incomes.

Diageo’s dividend yield is just over 3% and this has grown at a rate of around 8% per annum over the last five years. Earnings have been a little stunted lately as emerging market growth has slowed, but over the long term, Diageo should be able to continue rewarding its shareholders with both capital and dividend growth.

But on the current P/E ratio of 19 the stock isn’t cheap and it might pay to wait for a pullback before buying.

Woodford’s largest holding

Tobacco company Imperial Brands (LSE: IMB) can be found in many income portfolios due to its strong dividend yield. The company currently yields 3.86% and this is forecast to rise to 4.12% next year. It’s also the largest holding in Neil Woodford’s fund, making up almost 8% of his portfolio.

But does that make it a great retirement stock?

Personally, I’m not 100% convinced about the long-term prospects for tobacco companies. With rapidly changing views towards smoking, I have reservations over whether Imperial Brands will be able to grow its revenues in the future.  

Although earnings were up 8% last year and dividends have grown by almost 11% annually over the last five years, a closer look at the income statement reveals that the general trend for revenues appears to be down – and that’s certainly not ideal for a retirement stock.

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Edward Sheldon owns shares in BAE Systems plc. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.