If you’ve reached 50 years of age with no retirement savings, it’s not too late to start saving. Indeed, the historical returns of both the FTSE 100 and FTSE 250 show that even modest sums of capital can grow at a relatively rapid rate in a short time frame.
With that in mind, now could be the right time to buy a range of large-cap shares to improve your chances of retiring early. Today, I’m going to outline two such opportunities that could help you build a substantial retirement fund with the potential to pay a generous income in older age.
Construction equipment rental firm Ashtead (LSE: AHT) might not be the most exciting business on the market, but that hasn’t stopped the company in the past decade.
Since the financial crisis, the group has gone from strength to strength and its share price has increased by more than 6,000% since 2009, excluding dividends. Including dividends, the stock has returned 41% per annum over the past decade.
In the past six years alone, the company’s earnings per share have grown at a compound annual rate of nearly 30% and revenue has almost tripled as Ashtead expanded around the world.
The company provides an essential service to tens of thousands of small construction firms globally and, because the cost of buying equipment is so high, this isn’t likely to change any time soon.
That’s why I think this company could be an excellent investment to retire on. Ashtead can continue to use its size and economies of scale to buy equipment at cost and then lease it to firms at an attractive rate of return. That’s evidenced by its operating profit margin of 27%.
The stock currently trades on a price-to-earnings (P/E) ratio of just 12.2, suggesting a wide margin of safety given the company’s historical growth rate.
If the share produces the same kind of return for investors over the next decade, as it has done since 2009, it would be enough to turn an initial investment of £20,000 into a £1m retirement fund.
Another FTSE 100 company I think has the potential to produce attractive long-term returns is Diageo (LSE: DGE).
The drinks gaint has invested heavily in its brands and distribution infrastructure over the past few years. Management has also reduced costs as part of its goal to improve efficiencies across the group.
These actions have had a significant impact on the company’s bottom line. Net income is up by around £1bn since 2016, an increase of more than 40%.
With the stock trading on a forward P/E of 23, it’s not the cheapest investment in the FTSE 100. However, Diageo’s growth strategy appears to be highly effective, and its stable of drinks brands, which includes billion-dollar brands such as Johnnie Walker, Guinness and Smirnoff, should help ensure it remains a solid favourite among consumers.
Steady earnings growth of around 7% per annum, coupled with a dividend yield of 2.4%, shows that the stock could produce a near-10% per annum return for the foreseeable future. That would be enough to turn an initial deposit of £50,000 into a savings fund worth more than £1m, according to my calculations, over 30 years.
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Rupert Hargreaves owns no share mentioned. 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.