Here's an eye-opening statistic: older Americans are more afraid of running out of money than of death itself.
And older Americans have legitimate reasons for this worry, even if they have dutifully saved for their golden years. That's because the traditional ways people manage retirement may no longer provide enough income to meet expenses - and with people generally living longer, the principal retirement savings is exhausted far too early in the retirement period.
Your parents' retirement investing plan won't cut it today.
For example, 10-year Treasury bonds in the late 1990s offered a yield of around 6.50%, which translated to an income source you could count on. However, today's yield is much lower and probably not a viable return option to fund typical retirements.
While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of more than $1 million.
In addition to the considerable drop in bond yields, today's retirees are nervous about their future Social Security benefits. Because of certain demographic factors, it's been estimated that the funds that pay the Social Security benefits will run out of money in 2035.
Unfortunately, it looks like the two traditional sources of retirement income - bonds and Social Security - may not be able to adequately meet the needs of present and future retirees. But what if there was another option that could provide a steady, reliable source of income in retirement?
Invest in Dividend Stocks
As a replacement for low yielding Treasury bonds (and other bond options), we believe dividend-paying stocks from high quality companies offer low risk and stable, predictable income investors in retirement seek.
Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.
A rule of thumb for finding solid income-producing stocks is to seek those that average 3% dividend yield, and positive yearly dividend growth. These stocks can help combat inflation by boosting dividends over time.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
BankUnited, Inc. (BKU)
is currently shelling out a dividend of $0.31 per share, with a dividend yield of 3.3%. This compares to the Banks - Major Regional industry's yield of 3.52% and the S&P 500's yield of 1.57%. The company's annualized dividend growth in the past year was 7.41%. Check BankUnited, Inc. dividend history here>>>
M&T Bank Corporation (MTB)
is paying out a dividend of $1.35 per share at the moment, with a dividend yield of 3.01% compared to the Banks - Major Regional industry's yield of 3.52% and the S&P 500's yield. The annualized dividend growth of the company was 3.85% over the past year. Check M&T Bank Corporation dividend history here>>>
Currently paying a dividend of $0.39 per share,
Upbound Group (UPBD)
has a dividend yield of 6.39%. This is compared to the Financial - Leasing Companies industry's yield of 4.02% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.41%. Check Upbound Group dividend history here>>>
But aren't stocks generally more risky than bonds?
It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader stock market.
An upside to adding dividend stocks to your retirement portfolio: they can help lessen the effects of inflation, since many dividend-paying companies (especially blue chip stocks) generally increase their dividends over time.
Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.
If you're interested in investing in dividends, but are thinking about mutual funds or ETFs rather than stocks, beware of fees. Mutual funds and specialized ETFs may carry high fees, which could lower the overall gains you earn from dividends, undercutting your dividend income strategy. Be sure to look for funds with low fees if you decide on this approach.
Bottom Line
Regardless of whether you select high-quality, low-fee funds or stocks, looking for a steady stream of income from dividend-paying equities can potentially lead you to a solid and more peaceful retirement.
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BankUnited, Inc. (BKU): Free Stock Analysis Report M&T Bank Corporation (MTB): Free Stock Analysis Report Upbound Group, Inc. (UPBD): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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