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Social Security’s COLA is Puny: Here’s Help on Finding Smart Dividend Stocks

Social Security retirement benefit checks will rise by 1.7% in 2013, even though the general rate of inflation is actually a smidge higher.

US Consumer Price Index Chart

US Consumer Price Index data by YCharts

The disconnect is because the Social Security cost-of-living-adjustment uses a more specific inflation measure: the CPI for Urban Wage Earners and Clerical Workers (CPI-W). And from the third quarter of 2011 through the third quarter of this year that gauge clocked in at just 1.7%.

What every senior knows is that 1.7% or 2.03% are likely insufficient to truly keep up with real-word price increases. The 2013 premium rates for Medicare have yet to be released, but even an extremely modest increase is going to eat into what Social Security beneficiaries actually get deposited in their bank accounts.

And while various measures of general inflation are hovering around 2%, the cost of medical services -- a larger than average cost for seniors -- rose 4.4% for the 12 months through September, according to the Bureau of Labor Statistics.

The 2013 Social Security COLA is just the latest frustration for senior citizens, who have been the collateral damage in the Federal Reserve’s massive easing policy. It’s sort of hard to live on a fixed income, when the traditional conservative income-producing investments don’t keep pace with inflation, as seen in looking at the 10 year Treasury note yield.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts

Turning to dividend-paying stocks has been one strategy to generate more income. And to be sure, the classic “conservative” utility sector is ponying up compelling yields. Both Consolidate Edison (ED) and Southern Company (SO) pay more than double the yield on a 10-year Treasury.

ED Dividend Yield Chart

ED Dividend Yield data by YCharts

But anyone considering buying today needs to take a look at the valuation of the stock. Quite simply, the clamor for the steady (and high) dividend payouts from utilities has pushed many utility stocks into pricey territory.

ED PE Ratio TTM Chart

ED PE Ratio TTM data by YCharts

As with all investing, a diversified approach to dividend investing can help mitigate the risk of sector overweights. Stocks rated Attractive by YCharts that deliver strong dividend yields include stable consumer stocks such as Campbell Soup (CPB) and Kellogg (K) and energy companies such as Chevron (CVX) and Royal Dutch Shell (RDSA).

K Dividend Yield Chart

K Dividend Yield data by YCharts

For investors looking to stay ahead of inflation in the coming years, focus on companies with a steady dividend growth pattern that is above the inflation rate.

Carla Fried is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

Read more articles about: Investing Ideas  

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