Ultimately, you'll face at least one of two huge retirement risks:

  • Running out of money.
  • Running out of life.

One will get you before the other does, but neither one of them is necessarily pleasant to face unprepared. If you run out of life before you run out of money, somebody else will enjoy the rewards from your thrift. If you run out of money first, then you wind up destitute at a stage in your life when you're less likely to be able to go back to work.

Where's the balance?
Unless your crystal ball works better than mine, you neither know when you're destined to die nor how the market will treat your investments until then. So your retirement investment plan needs to balance those two risks to maximize your chances of enjoying both your remaining time and money.

The classic strategy is the 4% rule. In essence, you withdraw 4% of a well-diversified portfolio in your first year of retirement. Then, you adjust that withdrawal upward by inflation every year and have a reasonable shot of having your money's purchasing power last as long as you do.

It's a decent approach, if you can follow it. One of its big limitations though, is that a mere $40,000 income requires a $1 million portfolio. To live like the average American family did in 2009, you'd need around $1.25 million.

The average net worth of a 65-year-old is closer to $0.25 million than $1.25 million, which means directly following that 4% rule may not provide enough for most retirees. As a result, tougher measures are often needed.

Get more aggressive
The trick, though, is finding a strategy that:

  • Lets you take out more than 4% today,
  • Protects you against inflation's long-term ravages, and
  • Still gives you a decent chance of seeing your money last as long as you do.

In today's market, that leaves only one realistic option: The stocks of companies that offer both high current yields and a decent history of raising their dividends. If your portfolio can throw off more than 4% in cash, you can take it as income without selling off the stocks that generate it. If those stocks raise their dividends faster than inflation, your purchasing power can keep pace, too.

Such companies were once plentiful. Thanks to the last few years' financial meltdown that knocked out so many institutions that were a bit too generous with their cash, though, there are far fewer left. Fortunately, the survivors span across multiple industries, which means you can invest in them while still keeping the "nearly free lunch" benefits of diversification. The table below shows survivors that have:

  • Yields of more than 4%,
  • Five or more consecutive years of higher dividend payments, and
  • An increase in the past year of more than the official 2.7% inflation rate:



Recent Yield

Year-Over-Year Dividend Change

Kinder Morgan Energy Partners (NYSE: KMP) Energy Pipelines 6.2% 5.9%
Reynolds American (NYSE: RAI) Consumer Staples 5.6% 9.7%
Verizon Communications (NYSE: VZ) Telecommunications 5.2% 2.8%
Southern Co. (NYSE: SO) Utilities 4.7% 4.0%
Digital Realty Trust (NYSE: DLR) Real Estate Investment Trust 4.4% 37.0%
Novartis (NYSE: NVS) Health Care 4.2% 20.0%
Leggett & Platt (NYSE: LEG) Consumer Discretionary 4.1% 3.9%

Are they still worth owning?
Given that so many companies stopped their generous dividends during the financial meltdown, it naturally raises the question of why these companies didn't. In some cases, they couldn't. As a REIT, Digital Realty Trust has to pay out at least 90% of its earnings to keep its special tax status. And as a partnership, Kinder Morgan Energy Partners passes its income (and tax burden) to its unit holders, making a high payout essential to attract investors and allow them to pay any tax liability.

In other cases, their operations and cash flows were somewhat buffered from the worst of the meltdown by providing regulated utility services. Both Southern Co. and Verizon have some businesses that fit that description.

And then there's the addictive nature of Reynolds American's tobacco business, which keeps people coming back for more. Likewise, Novartis makes pharmaceutical products, which in many cases can literally be "do or die" propositions for its customers. If people need a product, they're generally more willing to pay for it.

Which leaves Leggett & Platt. While the case for its continued success is somewhat less obvious than the others on that list, it has:

  • A 125-plus year operating history,
  • 39 consecutive years of paying higher dividends, and
  • The advantages of being the entrenched leader in many of its business lines.

That combination certainly speaks well for the company's long-term staying power.

How will you finance your future?
Ultimately, getting through retirement comfortably is a matter of balancing several needs:

  • Current income,
  • Keeping up with inflation, and
  • Trying to assure your money lasts as long as you do.

Owning the stocks of companies with decent current and still rising dividends just might be your best reasonable chance at successfully balancing all those priorities. That's especially true if the traditional 4% rule is a bit too conservative for the size of your nest egg.

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