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Tue. Aug. 25, 2009

4 Dividend Stocks For The Social Security Blues *

“The problem with Socialism is that eventually you run out of other people’s money.”
- Margaret Thatcher

If you have followed the U.S. Social Security saga over the last several years, you know it is projected to run out of money soon. As it turns out “soon” just may be much sooner than previously expected. To make matters worse, it has been “broke” for some time, but through creative accounting that would land a private-sector CFO in jail, the government has been able to keep the appearance of solvency.

Bill Fleckenstein in a recent MSN Money article, discussed several issues facing Social Security. Here are some of the key points from his article:

  • The Social Security problem is especially important because it likely will put additional pressure on the dollar and on bonds, and exacerbate the funding crisis down the road.
  • At $680 billion Social Security is the nation’s biggest social program.
  • As early as this year, Social Security will be transformed from an operation that’s helped finance the rest of the government for 25 years into a cash drain that will need money.
  • There is no money in the Social Security Trust Fund — just IOUs from the government to itself.
  • The trust fund could start running deficits in the next year. Social Security wasn’t supposed to go into the red until around 2015.
  • Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury’s need to raise money from investors.
  • In the 1980s and 1990s, when folks worried about the budget deficit, it was reported to be lower than it would have been had the Social Security Trust Fund’s money not been going into government coffers

Do you really want to bet your retirement on a system like this? I certainly won’t. When planning for retirement, my underlying assumption is that Social Security will go broke before I ever receive a dime. Like everyone, I will need an income during my retirement years. I am currently planting the seeds for that income with high-quality dividend stocks that have a long track record of increasing their dividends each year. Below are some blue chip dividend stocks that eventually end up in most income investors’ portfolio:

Wal-Mart Stores, Inc. (WMT) – Yield: 2.11% – Analysis
The largest retailer in North America knows how to treat customers and shareholders. WMT has rewarded investors with 35 years of consecutive dividend increases.

Abbott Laboratories (ABT) – Yield: 3.47% – Analysis
This drug manufacturer knows the best medicine for a sick portfolio is increased dividends. ABT has been dispensing higher dividends for 37 consecutive years.

Johnson & Johnson (JNJ) – Yield: 3.23% – Analysis
For 47 consecutive years this manufacturer of health care has delighted investors with increased dividends.

Procter & Gamble Co. (PG) – Yield: 3.14% – Analysis
This provider of branded consumer goods products and Dividend Aristocrat has made investors smile for 53 consecutive years with increased dividends.

As for Social Security running out of money, I think people will be paid what was promised since the government can print all the money it needs. However, what was promised may not be enough after inflation, particularly if a lot of money is printed.

Full Disclosure: Long ABT, JNJ, PG, WMT. See a list of all my income holdings here.


10 Responses to “4 Dividend Stocks For The Social Security Blues *”

  1. dizzy7 says:

    Excellent post and unfortunately likely to be only too accurate. I’ve been collecting social security for a couple of years now, but I very much doubt the program will offer nearly as generous benefits (if any) to my daughters when they retire.

    BTW, I think you made a slight typo with the ABT dividend rate. I’ts currently closer to 3.5% than 2.11%.

  2. Here’s another kicker: the only reason why the 2000 budget showed a surplus was because the feds tapped into a then-extant surplus in the Social Security books. It ain’t going to be there anymore.

  3. C.A. says:

    “At $680 billion Social Security is the nation’s biggest social program.”

    What about TARP?

    Are the IOUs in bullet item 4 the Treasury securities referred to in bullet item 6?

    Good article. Thnx. Didn’t know Wal-Mart has been around for 35 years.

  4. C.A.: I think the context of the $680 billion comment was an ongoing social program, vs a “one time project”.

    Yes, bullet 4 is referring to the Treasury Securities in bullet 6.

    The history of Wal-Mart can be traced back to the 1940s when Sam Walton began his career in retailing.

    Best Wishes,
    D4L

  5. The retired One says:

    I feel we will all have our s/s checks reduced by effects of inflation and our COLA’s jerked out from under us by a Govt that will develop a needs based system.
    Where-in the base will be fudged to pay little compaired to actual inflation.
    I can’t help but see the people in needed services like school teachers will keep making it and survive as both parents in most homes have to work.
    They can’t send their kids to private school they are just about making it as it is.
    Savings at 7 % for how long? This will soon be diverted by people that will pay less and less on their c/c’s until they give up hope. So they will divest themselves of assets that are trackable assets to file bankrupsy.
    They will be living and giving up hope of true home ownership. Just going day to day without looking to the future and plans for advancement.
    Most all future jobs will be outsourced right off the drawing board. They won’t even be offered in this country.Let’s see you have to pay income taxes as a citizen of the U.S.A.
    no matter where you live. But do you have to pay into S/S if you work out of the country?
    I wouldn’t count on Dividends from a american based company, even P&G and J&J and pepsi & coke will suffer. Just Look at how the revered disney is doing. Walmart may be one of the few to overcome the path we are on.

  6. Allan says:

    Social Security Trust Fund accounting is fairly complex (as it is for all federal government trust funds).

    (lots of historical US government numbers at: http://www.gpoaccess.gov/usbudget/fy11/hist.html)

    Bullet point #3 is not quite the whole truth; the trust fund has income from taxes (about $560 billion in 2009) and interest ($107 billion in 2009); using this to pay benefits (about $540 benefits in 2009).

    The SS trust fund invests all the excess of income vs. outgo in United States Treasury bonds and a net surplus of about $2.3 trillion as of 2009. These are paper IOUs; just like the bonds held by the US Military Retirement fund, the Chinese government and all US Treasury bond holders.

    Focusing on the state of SS Trust Fund avoids focusing on the real problem (not to say the SS trust fund is not a problem). The real, genuine, immediate and enormous problem is the General Fund (all spending other than the trust funds, primarily Social Security and Medicare).

    The General Fund, primarily defense spending, Medicaid, interest payments and Veteran affairs spending. We ran a deficit of $1,549 billion in 2009, a deficit of $641 in 2008 and have not had a surplus since since 2000; in fact in the last 50 years the General Fund has only had a surplus in 3 years. The SS trust fund has run a surplus in 41 years of of the last 50 years.

    Discussing the problems of SS is missing the elephant in the room. While interesting, Social Security is not our most pressing problem. What ever “fix” someone might suggest would be rather pointless with the General Fund hemorrhaging red ink. We allegedly fixed the SS problem in 1982 with a very large increase in Social Security taxes (while at the same time cutting individual and corporate income taxes).

    Fixating on Social Security while turning a blind eye to the General Fund is like worrying about your athlete’s food when you have just had your arm cut off.

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