Are you 65 or older?

If so, you're likely one of the 47.5 million people who currently depend on Medicare for either all or a portion of their medical expenses. Unfortunately, the trustees of the Medicare trust fund just released some information that could rearrange the way you think about your finances. Read on and I'll tell you why the road to retirement may not be as smooth as you had imagine, and then I'll give you five great stocks you can buy -- today.

The bad news keeps coming
It's true that after the terrible financial collapse of 2008, the market bounced back resiliently. Saving accounts have been increased, 401(k) balances restored, and company matching gotten back on the right track.

But what about the overall economy?

The reality, as told by the 2011 annual reports from Social Security and Medicare, is that the state of the entitlement programs that millions of Americans depend on is getting more and more dire. Here are just some of the startling statistics:

  • Medicare's hospital insurance trust fund (Part A) is projected to be exhausted by 2024, five years earlier than had previously been estimated.
  • A slower-than-anticipated economic recovery has caused Medicare revenues to decrease, while costs are expected to continually rise over both the short and long term.
  • The Social Security fund is likely to be extinguished by 2036, one year sooner than last year's report estimated.
  • Last year, Social Security outlays exceeded non-interest income for the first time since 1983. Again, the weak economy and correspondingly lower tax revenues accounted for a lot of this deficit.

Retirees need to recognize these red flags immediately and begin taking steps to shore up their finances; relying on Uncle Sam or your employer is simply not a bullet proof plan.

Don't get me wrong -- as the sole advisor and person responsible for my mother's retirement, I want more than anything to believe that Medicare will always cover the extreme costs associated with her Multiple Sclerosis. I want to believe she'll keep receiving those Social Security checks. But do I depend on them? Absolutely not.

My strategy since the day my father passed away has been simple: diversify and invest in dividend stocks.

Here are five for free
There are two important things to recognize about dividend stocks right off the bat. First, it's been well documented by academics and investors that dividend stocks have outperformed their non-paying brethren over the long run. This means capital appreciation -- in other words, Mom's portfolio is going to rise, not fall, over time. Second, dividend stocks actually produce income, so if and when you need extra money to help support you in retirement, you can use the cash from the dividends to do so.

In 2008, when I first established my mom's portfolio (talk about bad timing), I had the income portion of the above statement in mind. I knew Mom's gigantic medical costs would mean she would need a surplus of income to help cover her expenditures, and I knew dividend stocks could perform that function. I wanted to be in the market, as I knew that was the best way to grow her portfolio over time. But I also needed cash. Simple solution: dividends.

I didn't use a fancy strategy to choose the stocks. I looked for companies with these attributes:

  1. Large caps that paid dividends above 4%.
  2. That had 3-year average betas below 1.0, so as to avoid wild market gyrations.
  3. That had P/E ratios of no more than 15.0 to help ensure value.

The companies I chose three years ago obviously aren't the same exact companies I would choose today. But in order to help you in your quest for great dividend-producing stocks, I ran a new screen. Furthermore, I used our 170,000 strong investing CAPS community to weed out stocks with a low rating, and only included 4- or 5-star stocks. Here is a diversified basket of what I might buy today:



Dividend Yield

3-Year Beta

P/E Ratio

Telefonica (NYSE: TEF) Telecommunications 8.8% 0.97 7.5
Altria (NYSE: MO) Consumer Goods 5.6% 0.51 14.2
Exelon (NYSE: EXC) Diversified Utilities 5% 0.59 11.2
AstraZeneca (NYSE: AZN) Health care 4.9% 0.58 9.0
Kimberly Clark (NYSE: KMB) Consumer Goods 4.1% 0.41 15.0

*Source: CAPS data, 5/16/11.

Telefonica is the largest telecom company in Spain, but also has excellent growth opportunities in Central and South America. It has some obstacles in front of it due to the weak Spanish economy, but click here to see why I bought shares of the company for my own public-facing real money portfolio.

AstraZeneca, similar to other big name pharma companies like Eli Lilly (NYSE: LLY) and GlaxoSmithKline (NYSE: GSK), faces some patent expirations in the near future, but it's one of the highest yielding drug stocks and has been consistently shelling out dividends for 18 years. Because of its huge basket of blockbuster drugs, the company generates gobs of free cash flow, so the opportunity to pursue acquisitions and reinvest in R&D leaves me feeling good about the company's prospects.

I chose Altria and Kimberly Clark, both consumer goods companies, for two good reasons: They pay high dividends, and they are somewhat recession-proof because of their industries. Investing my mom's money in 2008 taught me a good lesson, which is that, ummm, stuff happens. I want companies in her portfolio that will be resilient in any market, no matter what happens in the economy.

Exelon, a longtime Fool favorite, has been paying shareholders for decades. As a utility provider in the Northeast and Midwest, Exelon has plenty of earnings to support shelling out dividends, as is illustrated by its 56% payout ratio. The company's electricity comes mostly from its 17 nuclear reactors -- a real nuclear powerhouse -- which account for about 20% of the U.S.'s nuclear power capacity. While some investors may be turned off by nuclear because of the recent events in Japan, remember: Nuclear energy is cheap to produce and keeps Exelon ahead of the game versus its competition.

Don't be distraught, keep investing
When we hear news about companies ridding themselves of pensions, health-care costs increasing, and entitlement plans in near danger, it's easy to throw up your hands and pretend financial freedom is out of your control. That would be the easy way out, however. What you've got to do is take part of your nest egg, invest in the market, specifically in dividend stocks, and take one step at a time. These are just five stocks to get you started, but if you're interested in more ideas, click here and get free access to this new Motley Fool report: 13 High Yielding Stocks You Can Buy Today.