Tuesday, November 4, 2014

Dividend Growth Stocks With A Defined-Benefit Pension

This year I turned 52. It seems that with each birthday, I think about and plan for retirement a little more. I have long since resolved that social security will not provide for my needs in retirement (nor was it ever intended to). I am one of an ever-shrinking group that is still covered by a defined benefit pension plan, though it was recently frozen and closed to new employees. So, how should a pension fund figure into my retirement?

One question many aging employees are asking is 'Can you count on receiving your monthly pension check?' Many pension plans are underfunded. By law, company's must have on hand most of the money owed to employees. As long as the company is viable, it is responsible for making up any deficit in its pension plan.

If the plan is less than 80% funded, it limits the employees options. For example, if the plan is less than 80% funded you won't have the option of taking the benefit as a full lump-sum payment; and your company may be forced to freeze the plan if it is less than 60% funded. Freezing the plan could mean no new employees are allowed to enter it, and current participants will no longer earn additional benefits.

One odd fact for those with a pension plan is that you are more likely to lose your job than lose your pension. Since the company is responsible for any deficit in their pension plan, it could choose to cut costs by laying employees to fund the pension plan deficit.

Up until the Delta pension ran into problems, I (naively) assumed what I was owed from my company's pension plan was an automatic entitlement. However, events have shown that when things go wrong, you may only receive a small portion of what was promised in glossy HR pamphlet.

While you're fairly safe on benefits accrued, you can't count on future ones. When the company I work for froze our pension fund, my projected benefits were cut in half. Your goal should be to save enough for retirement to fill the gap between your estimated expenses and what you've earned in your pension.

You should never rely solely on one source of income. You should have a backup plan and develop multiple source of retirement income. My retirement plan relies primarily on what I have invested and control, such as my 401(k), IRA and taxable portfolio. Since I will likely get something out of my pension plan even if a 'worse case scenario' occurs, I count that portion. As for social security, I don't even consider it in my retirement plan. If I receive anything from social security, it will be treated as a bonus.

To achieve my retirement goals, I am investing with a defined asset allocation model looks at all my investments in total. In retirement, your portfolio shifts from an investing mode to an income mode by either selling appreciated (hopefully) assets and/or withdrawing dividends for living expenses. My plan is to build an ever-increasing income stream from dividend growth stocks such as:

McDonald's Corporation (MCD) is the largest fast-food restaurant company in the world, with about 35,000 restaurants in 119 countries. The company has paid a cash dividend to shareholders every year since 1976 and has increased its dividend payments for 37 consecutive years. Yield: 3.6%

Johnson & Johnson (JNJ) is a leader in the pharmaceutical, medical device and consumer products industries. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 52 consecutive years. Yield: 2.6%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries. The company has paid a cash dividend to shareholders every year since 1891 and has increased its dividend payments for 57 consecutive years. Yield: 2.9%

The Coca-Cola Company (KO) is the world's largest soft drink company, KO also has a sizable fruit juice business. The company has paid a cash dividend to shareholders every year since 1893 and has increased its dividend payments for 52 consecutive years. Yield: 2.9%

3M Co. (MMM) is a diversified global company that provides enhanced product functionality in electronics, health care, industrial, consumer, office, telecommunications, safety & security and other markets via coatings, sealants, adhesives, and other chemical additives. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 56 consecutive years. Yield: 2.2%.  See MMM's full analysis here.

As the old adage goes, 'Everyone has a plan - failing to plan is planning to fail.' Retirement planning does not have to be complicated, but not doing it will complicate your retirement.

Full Disclosure: Long MCD, JNJ, MMM, PG, KO in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.

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Tags: MCD, JNJ, MMM, PG, KO,


  1. D4L,

    Very nice article my friend - developing multiple income streams in retirement is very very important.

    I think however that for your generation, you will be very pleasantly surprised that the SS checks will cover a very good chunk of your expenses. I am not sure what your monthly expenses are, but I would not be surprised if you are able to spend a very small portion of dividend income, with the rest being reinvested.

  2. Hi, D4L.
    I've been reading your stuff for a long time and recently moved from the peanut gallery into the lime light by launching my own blog. Thanks for the article and for the reminder. I've been a big proponent of establishing multiple pockets of security. I'm fortunate to have a small pension (which was from a prior job), a 401K, a taxable account, a Roth IRA account, and a traditional IRA account. I've considered rental real estate as well, but don't know if I'm cut out for the headaches that can be associated with it. I hope that the politicians can work together to save the Social Security system, so that I can partake when the time comes, but, for now, I have my doubts that this will happen. Thanks for being a resource to us younger folks. Best wishes for continued success.

    Goosemann Jones
    Flight to Dividends Blog

  3. My wife has a pension from the school district and that will be a major portion of our retirement until I can tap into my 401k/IRA along with the proceeds from the sale of the house. Of course dividends will play a nice roll 'bridging the gap' between early retirement age and when we can fully tap the retirement accounts.

    As far as SS goes...All of the estimates you receive from SS are based on the assumption that you will work at your current income levels until the various retirement ages (62/67/70). Based on my SS estimate I would receive just over $1000/month claiming at 62 based on age at retirement; close to $3500/month if I somehow managed to work until 70, no thank you. I look at SS for what it it, a safety net, it was never designed to be people's main source of income during retirement. Anything that comes from SS is just gravy.


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