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A FTSE 100 dividend growth stock that could help you overcome the meagre State Pension

The State Pension currently amounts to just over £164 per week. As such, it’s unlikely to be sufficient for an individual to live on comfortably in retirement. And with the age at which it’s paid set to increase in future years, the prospects for people not yet in retirement seem to be challenging.

As a result, buying FTSE 100 shares that offer reliable growth potential could be a shrewd move. They could offer impressive dividend growth outlooks, as well as sound risk/reward ratios to help an investor to build their retirement savings over a long-term timeframe.

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Dependable growth

One such company is FTSE 100 support services business Compass Group (LSE: CPG). It has an excellent track record of earnings growth, with its bottom line rising at a double-digit rate in four of the last five years. In fact, during that time, its net profit has increased at an annualised rate of 11%, which suggests it has a sound strategy that’s helping to deliver on its growth ambitions.

During the last four years, the company has been able to increase dividends by 40%. This works out as an annualised rate of almost 9%, which is clearly well ahead of inflation. With the company forecast to post 6% earnings growth in the current year, followed by growth of 9% next year, further dividend growth could be on the horizon. And with dividends being covered 2.1 times by profit, the current dividend yield of 2.3% could increase significantly in the long run.

With Compass having a relatively stable business model which is likely to deliver impressive profit growth, it appears to have an appealing risk/reward ratio. In the long run, it could outperform the FTSE 100 and help an investor to overcome a disappointing State Pension. As such, now could be the right time to buy it.

High valuation

In contrast, the investment potential of beverages company AG Barr (LSE: BAG) seems to be relatively limited. The firm released interim results on Tuesday which showed revenue grew by 5.5% to £136.9m. Its profit before tax moved 4% higher to £18.2m, with a relatively solid financial performance delivered despite a challenging and volatile marketplace at present.

The company continues to invest in its core brands and in innovation. Its newly-established partnerships with San Benedetto and Bundaberg are performing well, while its Funkin brand is gaining traction in new formats and new market segments.

The problem for investors, though, is that Barr’s share price seems to be excessively high. The company trades on a price-to-earnings (P/E) ratio of 26, and yet is forecast to post low-single digit earnings growth over the next two financial years. This suggests that it lacks value for money, and may mean that dividend growth is somewhat limited. As such, and while it’s performing well from a business perspective in a tough industry, its investment prospects seem to be disappointing.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended AG Barr and Compass Group. 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.