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These big FTSE 100 dividends could help you beat the State Pension

Are you unimpressed by the idea of a State Pension of only around £8,500 per year or so? You’re not alone, and the days are long gone since there was any realistic dream of living a comfortable life on it.

So we have to make our own provisions too, through company pension schemes and our own private investments. And I reckon that by far the best long-term personal investment for our retirement is buying shares in dividend-paying FTSE 100 companies.

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Why go for cash, even in a cash ISA, which offers pitiful long-term returns when there are plenty of top companies paying 5% per year and more in dividends (and seeing their share prices climb over time too)?

Variable dividends

Many investors look for steady dividends which vary little year-on-year, and I think that’s a great strategy if you want your income now or you’re close to wanting it. But they can miss out on some very good long-term dividends which just happen to be more variable in nature.

Look at BHP Billiton (LSE: BLT), for example. On Wednesday the FTSE 100 miner released a positive operational update showing production going steady across its range of products. Copper production guidance for the full year has been lowered a little (though it is up over the latest quarter), and guidance for petroleum, iron ore, metallurgical coal and energy coal remain unchanged.

Costs are looking stable, and development projects are going according to plan. And that all bodes well for a predicted 7% rise in earnings per share for the year to June 2019 — and a juicy 6.9% forecast dividend yield. But what’s the downside?

Cyclic sector

Mining is a cyclical industry, and BHP and the rest of the sector are looking good now that a recent downturn in metals and mineral prices (not to mention oil) has been recovering. While BHP Billiton’s 2018 dividend yielded 5.4% (on the share price at the time), two years previously a pre-tax loss led to a yield of only 2.4%.

But if you’d bought BHP shares five years ago, you’d have accumulated a total dividend yield of 20% on your purchase price, even through a dividend dip. And reinvesting the cash would have have bought you cheap shares during the 2015-17 trough.

Big sell-off

Sometimes we see big dividend stocks going out of favour, and one of those that I like the look of is British American Tobacco (LSE: BATS). I remember an investor who some years ago gave up smoking and put the cash into tobacco shares, and he’s significantly wealthier (and almost certainly healthier) as a result.

The British American share price has been tumbling, losing a third of its value over the past 12 months. The reasons are more than the growing pariah status of cigarettes in the Western world and increasing government pressure on modern smoking alternatives, as my Fool colleague Edward Sheldon explains.

The share price crash has boosted the forecast yield for the current year to 6.2%, and that would rise to 6.6% on 2019 predictions. The company does carry a fair bit of debt due to its Reynolds American takeover, but even with that I see the shares as undervalued now. I reckon tobacco has a longer future than some people might think, and I see this as another tempting retirement dividend.

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Alan Oscroft 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.