How to Make Up for Social Security's Meager RaiseFor the first time since 2009, Social Security recipients will get an increase in their checks in 2012, thanks to the Cost of Living Adjustment process. The average Social Security check to a retiree in January is expected to be $1,229, a 3.6% COLA increase compared to the $1,186 it would have been without that hike.

As nice as it is to get any sort of raise, whether you're already receiving Social Security or you anticipate getting it someday, you need to ask yourself two key questions:

1. Have your costs of living really risen only 3.6% since the end of 2008?
2. Do you want to live on just that $1,229-a-month average Social Security payment?

If the answer to either of those questions is no, then you need to fill the spending gap that Social Security won't cover in order to retire comfortably.

Where to Look for Income

Unfortunately, these days, there are pretty slim pickings for income-seeking investors. Bonds, a traditional source of investment income, are yielding abysmally low rates. Even the longest-dated and highest-yielding 30-year Treasury bonds carry an interest rate right around 3%. At that yield, with inflation running at 3.4% over the past 12 months, all you're really getting by buying those bonds is a promise that your money will lose its purchasing power less quickly than if you were just holding cash.

However, today's investors can find better options for income in a somewhat less conventional place: stocks.

Oh, sure, no stock dividend is guaranteed, as no company has the Federal Reserve's power to print dollars at will. That makes individual dividend-paying companies riskier than Treasury bonds. Still, with a solid strategy, these days you can build an arguably better overall income portfolio with stocks than with those bonds.

Indeed, you can even build a stock-based portfolio with both a higher current yield than those 30-year Treasuries and the ability to potentially raise its dividends faster than Social Security has been rising. To do that in a market that has no guarantees, though, you need to pick your investments carefully.

4 Simple Rules for Investing in Dividend Stocks

When shopping for dividend-paying stocks, follow these guidelines:

• Diversify appropriately: You don't need to buy every stock in the market, but you'll want to own companies across multiple industries. That way, if one company -- or even industry -- fails, your dividend income won't be completely destroyed. Remember, it was just a few years ago that the global financial system imploded, taking many seemingly "indestructible" banks along with it.

• Look for companies with stable financial foundations: Judicious use of debt can help companies grow faster than they would have by trying to rely only on their internally generated cash flow. Too much debt, though, can be deadly when an investment doesn't work out. Looking for companies with debt-to-equity ratios below 2 will keep you among the companies that have kept their debt levels manageable.

• Check up on the dividend-paying history: Companies with proven track records of raising their dividends are likely to continue doing so if at all possible. In part, this happens because those companies know the market treats their dividends as signaling devices that proclaim the true health of their operations. No executives want to disappoint the market, especially with their own bonuses on the line.

• Be sure there's still room to grow: As valuable as those dividends are to investors, they come from companies' after-tax earnings -- money that would otherwise be available to continue to build the businesses. Payout ratios below two-thirds of earnings leave the companies with enough funding to continue to build the business and keep that streak of dividend growth alive.

Building a portfolio based on stocks with those characteristics and dividend yields hugging the same 3% level that 30-year Treasuries pay these days tends to get you corporate stalwarts like these:

Company
Industry
Dividend Yield
Payout Ratio
10-Year Dividend CAGR
Debt-to-Equity Ratio
Chevron (CVX)
Energy
3%
22.1%
8.7%
0.1
Johnson & Johnson (JNJ)
Health care
3.5%
49.8%
10.9%
0.5
Intel (INTC)
Information technology
3.5%
30.8%
28.4%
0.2
PepsiCo (PEP)
Consumer staples
3.1%
48.6%
13.3%
1.1
General Dynamics (GD)
Industrials
2.9%
25%
12.8%
0.3
Carnival (CCL)
Consumer discretionary
3%
28.5%
7.3%
0.4
Aflac (AFL)
Financials
3.1%
29.3%
20.5%
0.3
Source: S&P Capital IQ, as of Dec. 20.

There are still no ironclad guarantees, and you'll need to regularly keep an eye on the companies you buy to assure they're still worth owning. That said, in order to fill the spending gap that Social Security won't cover and give your income a chance of increasing at least as fast as your real expenses do, those types of companies are worth considering.

After all, unless your true costs of living have only increased 3.6% since the end of 2008, all you're really getting from Social Security is a promise that inflation's bite won't hurt as badly as it otherwise would. That's cold comfort when it results in a choice between food and heat.

At the time of publication, Motley Fool contributor Chuck Saletta owned shares of Johnson & Johnson and Intel. Click here to see his holdings and a short bio. The Motley Fool owns shares of Intel, Aflac, and Johnson & Johnson, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, AFLAC, Chevron, Johnson & Johnson, and PepsiCo, as well as creating diagonal call positions in PepsiCo and Johnson & Johnson and a bull call spread position in Intel.


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33 Comments

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barryaclarke

Social Security will not affect congress. For too long we have been too complacent about the workings of Congress. Many citizens had no idea that members of Congress could retire with the same pay after only one term, that they specifically exempted themselves from many of the laws they have passed while citizens must live under those laws. The latest is to exempt themselves from the Healthcare Reform in all of its forms. The self-serving is out of control in both parties and it must stop because it appears to the me, myself, and I syndrome once elected. A solution is a proposed 28th Amendment to the United States Constitution and it would state: "Congress shall make no law that applies to the citizens of the United States that does not apply equally to the Senators and/or Representatives; and, Congress shall make no law that applies to the Senators and/or Representatives that does not apply equally to the citizens of the United States ."

December 29 2011 at 4:18 PM Report abuse +2 rate up rate down Reply
Gumby

Big mansions usually has 10 bedrooms, 8 baths, 3 living rooms, 2 kitchens, etc.. perfect for senior living ..

December 29 2011 at 12:26 PM Report abuse rate up rate down Reply
Gumby

it will be a wonderful way to spend your meager SS income living in a big mansion sharing with 20 other geezers, I mean.. There is huge yard, pool, tennis court , ten car garage, what more can you ask for ?? for 2 cool millons ... that is affordable housing or what ?

December 29 2011 at 12:25 PM Report abuse rate up rate down Reply
Gumby

Old Geezers can OCCUPY THE BIG MANSIONS NOW ON SALE AT HALF PRICE OFF IN TONY NEIGHBORHOODS.. The geezers can join togehter to buy them. maybe 20 geezers to a big mansion , they can live better than alone. Visiting nurses will have one stop to check on all geezers instead of driving around too much using up too much oil... Big mansions can be converted to homes for the elderly...

December 29 2011 at 12:24 PM Report abuse rate up rate down Reply
indisposed99999

seattlewkr
"emperical mathematical facts"? Sure. One thing I know that apparently you still don't, is that charts and graphs and percentages can be skewed any way the point prover wants to skew them. And that's a FACT.

Simply put, to somehow make a statement that a measurement has not changed since '75 says enough to me. Apparently since medical costs to most employers and probably everyone else have soared somewhat in the 500 or 600 percent increase range over the last 10 to 14 years, the metrics you're choosing to buy into need to be reworked.
----------------
You also apparently don't understand how basic finance works either. The metric used to measure COLA increases factors in the costs of health care. The fact that health care costs have increased by about 200% over the past 10-20 years (not the 500-600% you frankly made up) is factored into the equation, and is one of the PRECISE REASONS the COLAs have far exceeded core inflation over that same period, because the metric they use attaches more weight to health care costs than the core inflation metric.

December 29 2011 at 8:57 AM Report abuse rate up rate down Reply
1 reply to indisposed99999's comment
savemycountry911

That's telling seattle/IGreen. She's a dope.

December 30 2011 at 10:14 PM Report abuse +1 rate up rate down Reply
indisposed99999

seattlewkr
The Supreme Court could decide anything, but let's be practical (basis in reality), I do believe I have a right to the SS benefits, just as everyone else who paid into the fund would have the same opinion.

So practically speaking, why talk about something the Supreme Court wouldn't dare to do? Your relationship with reality needs some work.
-----------------
Its not reality that needs work, its yours. First and foremost, you apparently lack the iability to process facts. If they disagree with your worldview, you simply ignore them. Thats not intelligence, that's faith. However, blind faith in something that is easily disproven by objective reality is basically stupidity by another name.

Second, the Supreme Court doesn't need to do anything. It has already ruled in Flemming v. Nestor that you have no right to SS benefits. So whether you believe you have that "right" is irrelevant, you are simply wrong. If everyone else collecting benefits shares that same belief, then they are simply wrong as well.

Its not the Supreme Court that would act to cut your benefits, it would be Congress. And, like it or not, THAT IS PRECISELY WHAT IS GOING TO HAPPEN. If we don't change the rules for SS, Medicare or Medicaid, those three social programs, combined with the interest on the accumulated debt, will collectively consume more than 100% of all revenues by 2050. That means NO MONEY for national defense, education spending, roads, border security, food stamps and everything else that the federal government does.

Of course, that will never happen. Because, long before we get to that point, the bond markets will rebel. Greece found itself unable to borrow any longer once its total debts hit 150% of GDP. Greece was forced to cut pensions in order to borrow more.

Our debt is going to pass 100% of GDP in the next year or so, and would hit 150% in about 10 years. If you think our experience is going to be any different, you are sorely mistaken.

So, believe whatever you want to believe. Your beliefs are irrelevant when Congress is faced with the prospect of having to shut the federal government or cutting SS.

December 29 2011 at 8:54 AM Report abuse rate up rate down Reply
Frank

MY SS INCREASE WAS EATEN UP BY RAISING THE COST OF PREMIUM ON MEDICARE. CONSEQUENTLY MY TAKE HOME IS REDUCED BY$77 AND I WILL HAVE FEWER $s TO SPEND SO MUCH FOR THE INCREASE. FJHILL

December 28 2011 at 11:08 PM Report abuse +1 rate up rate down Reply
savemycountry911

seattle/IGreen loves to cut and paste from lunatic left websites. I think she actually believes that nonsense.

December 28 2011 at 7:31 PM Report abuse rate up rate down Reply
savemycountry911

seattle is IGreen

Hello, my old nemises IGreen.
Where have you been, were you jailed?
Is that what made you nasty and mean
Or that Obama has failed?
You say SS = welfare.
Now you know that's just dumb.
We pay for Social Security.
Many on welfare are bums.

December 28 2011 at 7:30 PM Report abuse +1 rate up rate down Reply
indisposed99999

seattlewkr
Furthermore,
Before you get all armchair actuarial again, consider this:
I have seen numerous seniors retire from my workplace after having paid 35 to 45 years into SS, only to be retired and dead in two to five years, and the spouses too.

Don't go giving me this garbage that the government's generous with the COLAs, when people are funding it on their own. I have paid the maximum into SS for at least 20 years of my 30-year worklife (the ceiling). When you start saying things like "the govt. is generous," I get pretty defensive, having 13 of those years put up the entire 6 percent myself, being self-employed those years.

Let's be a little more respecful of our elderly, okay? Even though you may be independently well off, try to find that place of respect for "reality" when it comes to heat or eat or meds. Generous. Oh, brother. Yeah, with my own damn money.
-------------------
Ok, lets start by correcting the factual mistakes in your post. First off, the elderly today are not funding their own COLAs...they are retired. People working today are funding their increased payments. Second, you act as if you have some legal right to SS. Guess what, the Supreme Court ruled 50 years ago that you don't. If Congress voted tomorrow to eliminate the program, the amounts you paid in are gone forever. Third, if you are self employed, which I am, the total is not 6% (or 6.2% in reality), but actually 12.4%, since you pay both the 6.2% employee and 6.2% employer side.

WHile we are on the subject, its telling that you reflexively assume that I am a right wing nut. I'm not. I am probably far more liberal than you are in my politics. The difference is that I am grounded in economic reality. Any increase in benefits today comes at a cost. That cost is the ability to finance the program in the future. So, if you want to give grandma more, you have the right to your opinion. But don't get all sanctimoneous about how you pay into the system.....grandma's increase today makes it that much less likely that you will get back what you paid into the program.

The facts are the facts. Since 1975, we have used a single metric to determine COLAs for SS. Contrary to what that person posted, this formula includes the costs of food, fuel and health care. Contrary to what this person posted, it also has not been changed since 1975. Moreover, its empirical mathematical FACT that, since 2008, the increase in COLAs has exceeded actual inflation. These are facts. You don't like them, write your congressman.

December 28 2011 at 5:13 PM Report abuse +2 rate up rate down Reply
1 reply to indisposed99999's comment
seattlewkr

"emperical mathematical facts"? Sure. One thing I know that apparently you still don't, is that charts and graphs and percentages can be skewed any way the point prover wants to skew them. And that's a FACT.

Simply put, to somehow make a statement that a measurement has not changed since '75 says enough to me. Apparently since medical costs to most employers and probably everyone else have soared somewhat in the 500 or 600 percent increase range over the last 10 to 14 years, the metrics you're choosing to buy into need to be reworked.

In short, I could give a **** about what your charts and graphs show. I don't need them. What I see is right in front of me, and that is "medicines" or "heat." So we can just agree to disagree. If that's sanctimonious, fine. And I'm sure the retired folks appreciate your calling them "grandma," consistent with the rest of your know-it-all and arrogant style of imparting numbers that I'm sure could be picked apart all day.

December 28 2011 at 6:57 PM Report abuse -1 rate up rate down Reply
1 reply to seattlewkr's comment
seattlewkr

The Supreme Court could decide anything, but let's be practical (basis in reality), I do believe I have a right to the SS benefits, just as everyone else who paid into the fund would have the same opinion.

So practically speaking, why talk about something the Supreme Court wouldn't dare to do? Your relationship with reality needs some work.

December 28 2011 at 7:01 PM Report abuse -1 rate up rate down