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Why I think the Diageo share price can help you beat the State Pension

As we’re getting close to Christmas, I’m thinking of Diageo (LSE: DGE) for several reasons.

One is that I’m a long-time consumer of the company’s booze — and with brands that include Johnnie WalkerGordon’sSmirnoffCaptain Morgan and Guinness along with many more, I’m in good company. And ever since I learned that the company makes something called Rumple Minze, I’ve wanted to try that too.

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The other reason is that I like Diageo as an investment, and I see it as a great and relatively safe stock to buy in these troubled times for those of us making long-term plans for our retirements.

Quality valuation

Diageo shares traditionally trade on P/E ratios of around 20 and higher, and that’s significantly ahead of the FTSE 100‘s long-term average of around 14. But top quality shares typically command higher valuations, and Diageo’s price is boosted by its consistent high margins and its global appeal.

As a result, Diageo shareholders have been rewarded with a 40% share price rise over the past five years. If forecasts prove accurate, that will have been backed by a 31% rise in earnings per share.

Dividends have been modest at generally between 2.4% and 3%, but they’re always well covered by earnings and they look to me to be some of the safest in the Footsie. And they’re nicely progressive too, with this year’s payment expected to provide a cumulative 33% rise over five years. With individual years’ hikes of around 5% being well ahead of inflation, I reckon buying the shares and reinvesting the dividends could be one of the best moves a canny pension investor can make today.

Expensive?

Reckitt Benckiser (LSE: RB) is another stock that might look, on the face of it, to be a bit expensive. Like Diageo, the shares have been commanding P/E multiples in the low 20s, and again it’s based largely on the ubiquity of the company’s brands.

In this case they’re common household names, including Dettol, Scholl, Strepsils, Nurofen, Cillit Bang, and plenty more. If you were to clear the supermarket shelves of Reckitt Benckiser and Unilever househould products, I reckon some of the aisles could be almost emptied (and Unilever would be one of my top stocks for long-term safety too).

As Royston Wild pointed out recently, the Reckitt Benckiser story has been one of relentless earnings growth, and that feeds through into dividends. Yields are similar to Diageo’s, averaging around 2.5% over the past five years, so not the highest in the FTSE by a long way.

Progressive

But inflation-busting dividend rises are key, and forecasts to December 2019 suggest a cumulative five-year gain of 30%. Again, that’s well ahead of inflation. Oh, and the share price itself has risen by 32% over five years.

As it happens, two more years of forecast earnings growth would put the shares on a P/E of under 18 for 2019. And while that’s still ahead of the FTSE average, it’s not by much — and it’s cheaper than Reckitt Benckiser’s long-term trend.

Do you want to try to live on the State Pension of around £8,500 per year, or do you think you can do better? I think you could do a lot worse than these two stocks.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. 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.