According to the classic advice given by financial planners, your retirement plan was supposed to be a “three-legged stool,” consisting of a company pension , Social Security and personal savings. It’s looking pretty clear to me you can’t count on anything better than a pogo stick, because two of the those three legs are gone or going.
First, there was the death of pensions plans, replaced for most working Americans by 401(k)-like plans, whose growth depends mostly on your own contributions and investment returns. Scratch one leg.
And now there’s serious doubt about the second leg, Social Security. According to a recent report by the Heritage Foundation, the $3 trillion trust fund that is supposed to be reserved for Social Security simply has vanished. Uncle Sam has frittered it away, and without reform, the reports says benefits are likely to be cut by 22%. Frankly, I think that’s optimistic.
So the prudent man realizes it’s all up to him. We have no one to count on but ourselves. That means saving as much as possible, taking full advantage of whatever tax breaks we can, and picking the smartest investments, investments that, once we walk out the office door for good, capable of delivering an income stream that’s not only reliable, but grows. What I’m talking about is dividend-paying stocks, from companies with a long history of increasing their payouts.
For years, investment professionals would always advocate dividend paying stocks as being important to one’s portfolio. The compounding factor of reinvested dividends was important to long-term performance, they’d say. The generations of fixed income was important during retirement, they’d say. Dividend stocks were generally solid companies, they’d say.
All of this remains true. But given the uncertainty of Social Security, dividend stocks are not merely “important,” they are essential. They should be overweighted in everyone’s stock portfolio, even in those of young people who are just beginning to invest.
If you don’t have a retirement plan, then all the more reason why you need to supplement your eroding social security benefits. Dividends can do that for you. It doesn’t matter whether you choose to take all or some of your dividend and invest them in TIPS, or just reinvest in company stock, what’s essential is that you buy those dividend stocks now.
You’ll want to go with solid companies that have a bright future ahead, or at least one that is stable. My favorites in this category are:
- Philip Morris International (PM)
- Altria (Mo)
- Chevron (CVX)
- Abbott Laboratories (ABT)
- Kinder Morgan Energy Partners L.P. (KMP)
- Coca-Cola (KO)
- Duke Energy (DKE)
- Wal-Mart (WMT)
- Walt Disney (DIS)
- AT&T (T)
- IBM (IBM)
- Automated Data Processing (ADP)
Preferred stocks, with their attractive yields and priority over commons stocks, are another fantastic equity income idea investors should be jumping on now. With bonds yields so low and with little prospect of a significant boost for the foreseeable future, so little, and interest rates likely to stay low preferreds offer great and stable dividends.
About Lawrence Meyers
Larry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at firstname.lastname@example.org.