Social Security Is in Trouble - Protect Your Retirement

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Warning: Reading the 2012 Social Security annual report will likely unsettle your stomach.

Social Security’s expenditures exceeded non-interest income in 2010 and 2011.”

“The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.67 percent of taxable payroll, up from 2.22 percent projected in last year's report.”

“However, the Disability Insurance (DI) program satisfies neither the long-range test nor the short-range test. DI costs have exceeded non-interest income since 2005, and the Trustees project trust fund exhaustion in 2016.”

Leaves you with lots of confidence, doesn’t it?  Other reports indicate Americans under the age of 50 or so can expect a cut in their projected benefits of 16%.  Well, at least that’s better than the 27% I read about a few years ago, but still...

What Can You Do To Protect Your Retirement? 

I suggest two types of investments:  Business Development Companies (BDCs) and Master Limited Partnerships (MLPs), particularly oil or gas pipeline companies.  Both of these investment vehicles offer higher dividends and tax advantages most dividend paying stocks don’t or can’t.  Assuming Congress raises taxes on corporate dividends to avoid the country’s “fiscal cliff,” these investments may offer significant after tax returns.  Afterall, there's no sign yet that Congress will raise taxes on distributions from BDCs or MLPs.

Pipeline Companies with Growing Distributions

Enterprise Products Partners (NYSE: EPD) is a distribution machine and has been since 2003.  Since its IPO in 1998, the company has grown its assets from $715 million to $34 billion today courtesy of growth and acquisitions.  Enterprise operates pipelines for natural gas, crude oil and refined petroleum products.  For income investors, the company pays a distribution yield of 5.2% with steadily increasing distributions annually, if not quarterly.  While the PE ratio is a bit high at 17.6, the earnings per share have increased 24% over the past year and the return on equity is 19%.  This performance, coupled with the steady rise in distributions, justifies, in my opinion, the high PE ratio.  Further, Enterprise is doing a terrific job of growing its business as fellow Motley Fool blogger Matt Di Lallo pointed out not too long ago.

For those seeking capital gains with a nice distribution, Plains All American Pipeline (NYSE: PAA) should grab your attention.  Based in Houston, Texas, PAA offers a decent 4.7% dividend that the folks at say has been steadily growing also since 2003.  Driving these dividends is a steady rise in revenue.  Earnings have generally exceeded expectations since FY 2009.  The most recent quarter saw a decline in earnings due to a non-cash impairment charge from a decision not to proceed with its California Pier 400 project. Return on equity is 19%, total debt to equity is 1.1, and its PE is about 20.  Best of all, since 2009, PAA has been steadily climbing from $19/share to about $46/share after a recent stock split.  The future looks good.  PAA purchased natural gas and liquefied natural gas operations from British Petroleum (NYSE: BP), a move that gives PAA access to Canadian shale gas.  PAA expansion plans in the Eagle Ford and Permian Basin fields should pay off as oil production there continues to climb.  I foresee continued earnings growth from these developments.

And For a Little Excitement in Your Income Portfolio...

Main Street Capital Corporation (NYSE: MAIN) offers an enviable capital gains record.  In November, 2009, Main sold for roughly $14/share.  Today, it sells for $30 with the past year especially showing significant gains. This helps offset the relatively (emphasis, relatively) modest dividend of 6%.  The Motley Fool reports a return on equity of over 18% and an earnings per share growth for the past 12 months of 62%.  The PE is 8.3.  Main Street invests in established traditional businesses typically based in the Southern, South Central or South Western parts of the United States.  This bodes well since more Americans are moving to the southern half of the country.  Speculative or start up companies need not apply.  Main Street’s latest very positive earnings report reflects this successful approach to funding established rather than start up companies.  While other BDCs offer higher yields, I like Main's conservative approach for retirement income purposes.

Foolish Final Thoughts

Few in Congress care to publicly admit it, but Social Security can’t continue like it has.  The program has simply promised too much to too many people for too long.  Current retirees understandably don’t want any benefits cuts but neither do younger workers currently paying into the system.  Building a portfolio of dividend (or distribution) paying investments can help protect your “golden years.”  BDCs offer a superior yield but carry some risk that may not be appropriate for all retirees.  Pipeline Master Limited Partnerships can provide growing income in a safe industry.  With the growth of shale oil and natural gas production, pipeline companies offer a significant and relatively safe play for retirement income. Given the future of Social Security, you might just need it.

dylan588 has long positions in Mian Street Capital and British Petroleum. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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