Your portfolio must be overweight in dividend stocks, now more than ever before.
For years, investment professionals would always advocate dividend 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. However, dividend stocks are not merely "important" any more. They are essential. They not only belong in everyone's retirement portfolio, but even young people who are just beginning to invest must overweight their portfolio in the dividend stock portfolio. The reason is this: our nation's Social Security system is effectively bankrupt, and in about 20 years, benefits are going to be cut. That means whatever income you think you're going to get when you retire is not going to be there.
The Heritage Foundation wrote (beginning on page 14 of the link) that the $3 trillion trust fund that is supposed to be reserved for Social Security simply isn't there. Congress spent it. Without reform, benefits are likely to be cut by 22%. Personally, I'm even more pessimistic.
That means that the tax that the government takes from everyone's paycheck will not provide you with your promised benefits. They will need to be replaced. 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)
Now is also a fantastic time to load up on preferred stocks. With bonds yielding so little, and interest rates likely to stay low for awhile, these gems can provide some great dividends that are stable. I've also got loads of other ideas across the fixed income spectrum in this article and this one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.