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2 FTSE 100 income champions I’d buy to retire on

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Choosing the right stocks for your retirement portfolio is a complicated process. There are literally hundreds of dividend stocks out there, but only a few are worth buying and holding for the long term.

Today, I’m taking a look at the investment case for FTSE 100 dividend champion Legal & General (LSE: LGEN) and homebuilder Barratt Developments (LSE: BDEV), two companies that I believe have all the hallmarks of successful long term stocks.

Buy and forget

When it comes to income, it’s difficult to beat Legal’s 6% dividend yield. And as well as this market-beating payout, the stock also currently trades at a P/E ratio of just 10, making it one of the cheapest blue-chip income plays around.

I believe the reason why the market has placed such a low value on the stock is because Legal’s primary business, managing retirement savings and investments, is a dull, low-growth business. Indeed, City analysts are only expecting the company to report earnings per share growth of 4% for 2018, followed by an increase of 5.6% for 2019.

Still, for income investors, the slow growth shouldn’t be a turn-off. In fact, I believe Legal’s slow and steady business model makes it the perfect buy for investors looking for long-term income.

As the company is responsible for the pensions of hundreds of thousands and possibly even millions of customers around the world, management has to act conservatively. This implies that while it might not win any awards for growth, the group’s fortress balance sheet should help backstop the dividend for many years to come.

Homebuilder Barrett operates in an entirely different industry, but in my opinion, the company has many of the same qualities.

Focus on stability 

While Barrett might not be as focused on conservative long-term management as the team at Legal, having only just survived the 2008 financial crisis, the company has adopted an extremely cautious attitude towards capital management over the past 10 years. 

The result of these efforts shows clearly on the group’s balance sheet. Specifically, at the end of fiscal 2017, the business had net cash of £711m on the balance sheet, around 13% of its market capitalisation.

Even though it can be argued we are at the top of the housing cycle, and home builders have benefited over the past few years from a Goldilocks environment of rising prices and low costs, boosting profit margins to near record levels, I believe the favourable climate will continue for these companies as housing supply in the UK remains tight

Barrett might see a slight fall in profit, but I think over the long term the company will continue to churn out an impressive amount of cash for investors. City analysts are expecting the firm to distribute 42.3p per share to investors this year, up 73% on 2017. Based on this target, the shares currently support a dividend yield of 7.6%.

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Rupert Hargreaves owns no share 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.