Improve Your Retirement Income with These 3 Top-Ranked Dividend Stocks

Strange but true: seniors fear death less than running out of money in retirement.

And unfortunately, even retirees who have built a nest egg have good reason to be concerned-with the traditional approaches to retirement planning, income may no longer cover expenses. That means retirees are dipping into principal to make ends meet, setting up a race against time between dwindling investment balances and longer lifespans.

Retirement investing approaches of the past don't work today.

For many years, bonds or other fixed-income assets could produce the yield needed to provide solid income for retirement needs. However, these yields have dwindled over time: 10-year Treasury bond rates in the late 1990s were around 6.50%, but today, that rate is a thing of the past, with a slim likelihood of rates making a comeback in the foreseeable future.

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.

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.

How can you avoid dipping into your principal when the investments you counted on in retirement aren't producing income? You can only cut your expenses so far, and the only other option is to find a different investment vehicle to generate income.

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.

Going beyond those familiar names, you can find excellent dividend-paying stocks by following a few guidelines. Look for companies that pay a dividend yield of around 3%, with positive annual dividend growth. The growth rate is key to help combat the effects of inflation.

Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.

Cullen/Frost Bankers (CFR) is currently shelling out a dividend of $1.00 per share, with a dividend yield of 3.22%. This compares to the Banks - Southwest industry's yield of 0.91% and the S&P 500's yield of 1.54%. The company's annualized dividend growth in the past year was 8.7%. Check Cullen/Frost Bankers dividend history here>>>

Exelon (EXC) is paying out a dividend of $0.40 per share at the moment, with a dividend yield of 3.47% compared to the Utility - Electric Power industry's yield of 3.12% and the S&P 500's yield. The annualized dividend growth of the company was 5.26% over the past year. Check Exelon dividend history here>>>

Currently paying a dividend of $0.40 per share, Janus Henderson Group plc (JHG) has a dividend yield of 3.70%. This is compared to the Financial - Investment Management industry's yield of 1.63% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 2.56%. Check Janus Henderson Group plc dividend history here>>>

But aren't stocks generally more risky than bonds?

The fact is that stocks, as an asset class, carry more risk than bonds. To counterbalance this, invest in superior quality dividend stocks that not only can grow over time but more significantly, can also decrease your overall portfolio volatility with respect to the broader stock market.

Combating the impact of inflation is one advantage of owning these dividend-paying stocks. Here's why: many of these stable, high-quality companies increase their dividends over time, which translates to rising dividend income that offsets the effects of inflation.

Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.

You may be thinking, "I like this dividend strategy, but instead of investing in individual stocks, I'm going to find a dividend-focused mutual fund or ETF." This approach can make sense, but be aware that some mutual funds and specialized ETFs carry high fees, which may reduce your dividend gains or income, and defeat the goal of this dividend investment approach. If you do wish to invest in a fund, do your research to find the best-quality dividend funds with the lowest fees.

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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This article originally published on Zacks Investment Research (zacks.com).

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