3 Top-Ranked Dividend Stocks: A Smarter Way to Boost Your Retirement Income

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

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.

The tried - and - true retirement investing approach of yesterday doesn't work 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.

The impact of this rate decline is sizable: over 20 years, the difference in yield for a $1 million investment in 10-year Treasuries is 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.

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.

First Financial Bancorp (FFBC) is currently shelling out a dividend of $0.25 per share, with a dividend yield of 4.14%. This compares to the Banks - Midwest industry's yield of 2.66% and the S&P 500's yield of 1.51%. The company's annualized dividend growth in the past year was 4.35%. Check First Financial Bancorp dividend history here>>>

H20 (HTO) is paying out a dividend of $0.42 per share at the moment, with a dividend yield of 3.60% compared to the Waste Removal Services industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 5% over the past year. Check H20 dividend history here>>>

Currently paying a dividend of $0.26 per share, Independent Bank (IBCP) has a dividend yield of 3.34%. This is compared to the Banks - Midwest industry's yield of 2.66% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 8.33%. Check Independent Bank 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.

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

Pursuing a dividend investing strategy can help protect your retirement portfolio. Whether you choose to invest in stocks or through low-fee mutual funds or ETFs, this approach can potentially help you achieve a more secure and enjoyable retirement.

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

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