Believe it or not, seniors fear running out of cash more than they fear dying.
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.
That means if you had $1 million in 10-year Treasuries, the difference in yield between 1999 and today 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.
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
As we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant low risk, low yielding Treasury and fixed-income alternatives.
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 4.13%. This compares to the Banks - Major Regional industry's yield of 4.2% and the S&P 500's yield of 1.64%. The company's annualized dividend growth in the past year was 7.41%. Check BankUnited, Inc. dividend history here>>>
Calavo Growers (CVGW)
is paying out a dividend of $0.2 per share at the moment, with a dividend yield of 3.23% compared to the Agriculture - Operations industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 100% over the past year. Check Calavo Growers dividend history here>>>
Currently paying a dividend of $0.22 per share,
Mosaic (MOS)
has a dividend yield of 3.31%. This is compared to the Fertilizers industry's yield of 2.65% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 4.76%. Check Mosaic 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're thinking, "I want to invest in a dividend-focused ETF or mutual fund," make sure to do your homework. It's important to know that some mutual funds and specialized ETFs charge high fees, which may diminish your dividend gains or income and thwart the overall objective of this investment strategy. If you do want to invest in fund, research well to identify the best-quality dividend funds with the least charges.
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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BankUnited, Inc. (BKU): Free Stock Analysis Report The Mosaic Company (MOS): Free Stock Analysis Report Calavo Growers, Inc. (CVGW): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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