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 The dividend income remains tax free as long as it not withdrawn.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.
While many retirees from Detroit and other domains where pensions have or will be reduced would be thrilled to have it last until death, those with defined contribution plans such as a 401(k) or IRA have assets that will outlive them. An IRA or 401(k) can be left to an heir or a charity. It can easily outlast the owner, especially is there is an early death. That is not true with a defined benefit pension. In this regard, a defined contribution plan is far superior to a defined benefit plan in providing for the loved ones after the worker is gone.
When an individual is in charge of his or her own retirement account, there is also a layer of impermeable protection against corporate mismanagement or public-sector corruption. If a business is mismanaged, the pension is lost or greatly reduced. The same can happen with public employee benefits. Detroit is the most recent example.
Another one recently transpired in Boston.
Less than a year after retiring as chief of the Massachusetts Bay Transportation Authority pension fund in Massachusetts, Karl White attracted $25 million in investments for Fletcher Asset Management, the New York hedge fund that hired him. As noted in an article in The Boston Globe, "Today that money is gone." The "investments" have been described by a bankruptcy trustee as having "many of the characteristics of a Ponzi scheme."
Individuals do not have that concern with a self-directed retirement account hosting a variety of shares of well-managed, publicly traded companies that have robust dividend yields with a history of yearly increases over the past half century.
It is tragic that retired workers must suffer reduced pensions because of public- and private-sector mismanagement. Instead, those nearing retirement should buying companies likeCincinnati Financial and American States Water for the long term based on their performance.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.