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.
Retirement investing approaches of the past don't work today.
Years ago, investors at or close to retirement could put money into fixed-income assets and depend on appealing yields to generate consistent, solid pay streams to fund a comfortable retirement. 10-year Treasury bond rates in the late 1990s floated around 6.50%, but unfortunately, those days of being able to exclusively rely on Treasury yields to fund retirement income are over.
That means if you had $1 million in 10-year Treasuries, the difference in yield between 1999 and today is more than $1 million.
Today's retirees are getting hit hard by reduced bond yields - and the Social Security picture isn't too rosy either. Right now and for the near future, Social Security benefits are still being paid, but it has been estimated that the Social Security funds will be depleted as soon as 2035.
So what can retirees do? You could dramatically reduce your expenses, and go out on a limb hoping your Social Security benefits don't diminish. On the other hand, you could opt for an alternative investment that gives a steady, higher-rate income stream to supplant lessening bond yields.
Invest in Dividend Stocks
We feel that these dividend-paying equities - as long as they are from high-quality, low-risk issuers - can give retirement investors a smart option to replace low-yielding Treasury bonds (or other bonds).
Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.
One approach to recognizing appropriate stocks is to look for companies with an average dividend yield of 3% and positive average annual dividend growth. Numerous stocks hike dividends over time, counterbalancing inflation risks.
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 3.93%. This compares to the Banks - Major Regional industry's yield of 4.23% and the S&P 500's yield of 1.78%. The company's annualized dividend growth in the past year was 7.41%. Check BankUnited, Inc. dividend history here>>>
First Financial Corp. (THFF)
is paying out a dividend of $0.51 per share at the moment, with a dividend yield of 4.7% compared to the Banks - Midwest industry's yield of 3.16% and the S&P 500's yield. The annualized dividend growth of the company was 13.33% over the past year. Check First Financial Corp. dividend history here>>>
Currently paying a dividend of $0.5 per share,
Tyson Foods (TSN)
has a dividend yield of 3.47%. This is compared to the Food - Meat Products industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 2.04%. Check Tyson Foods dividend history here>>>
But aren't stocks generally more risky than bonds?
Yes, that's true. As a broad category, bonds carry less risk than stocks. However, the stocks we are talking about - dividend -paying stocks from high-quality companies - can generate income over time and also mitigate the overall volatility of your portfolio compared to the stock market as a whole.
A silver lining to owning dividend stocks for your retirement portfolio is that many companies, especially blue chip stocks, increase their dividends over time, helping offset the effects of inflation on your potential retirement income.
Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.
If you prefer investing in funds or ETFs compared to individual stocks, you can still pursue a dividend income strategy. However, it's important to know the fees charged by each fund or ETF, which can ultimately reduce your dividend income, working against your strategy. Do your homework and make sure you know the fees charged by any fund before you invest.
Bottom Line
Whether you select high-quality, low-fee funds or stocks, seeking the steady income of dividend-paying equities can potentially offer you a path to a better and more stress-free retirement.
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BankUnited, Inc. (BKU): Free Stock Analysis Report Tyson Foods, Inc. (TSN): Free Stock Analysis Report First Financial Corporation Indiana (THFF): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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