Updated for clarity regarding taxes on page 1.
NEW YORK (TheStreet) -- A very painful lesson is about to be learned by the retired city workers of Detroit who will most likely have their pensions reduced.
Rather than a defined benefit pension where a set amount is received each month -- as is the case with Detroit -- it is far better for an individual to have a defined contribution plan, such as an individual retirement account, bulging with such stocks as Cincinnati Financial (CINF), Diebold (DBD), American States Water (AWR) and Northwest Natural Gas (NWN).
These companies are a select few that are so solid that not only has each increased the dividend annually for more than half a century, but all have a yield over 50% higher than the average of about 1.9% for a member of the Standard & Poor's 500 Index.
A major reason for investing in dividend stocks rather than relying on a set pension is these companies are more stable. Just having a dividend is a sign of financial strength for a publicly traded firm. Paying a dividend that is 50% more than the mean for the top 500 publicly traded entities is even more impressive.
Increasing the dividend paid annually for more than 50 years is extremely reassuring for an investor. Adding to this is the rising dividend income is tax-free when the equity is in a retirement account. The dividend income remains tax free as long as it not withdrawn. It is not taxed when it is paid, as it would be if it were not in a retirement account.
Having a basket of these stocks in a retirement account also provides diversity in investing for the long term, too.
Obviously, that is more stable than relying on the soundness of just a single company to make the payments for a defined benefit plan pension. Based on what is happening with the bankruptcy of Detroit and the tenuous finances of others as detailed in my previous article on TheStreet, these elite companies that pay above-average dividends that grow regularly are far more stable than many American cities.
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