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

Here's an eye-opening statistic: older Americans are more afraid of running out of money than of death itself.

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.

The tried - and - true retirement investing approach of yesterday doesn'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.

The effect of this drop in rates is substantial: over 20 years, the change in yield for a $1 million investment in 10-year Treasuries is over $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

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.

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.

Bristol Myers Squibb (BMY) is currently shelling out a dividend of $0.63 per share, with a dividend yield of 4.57%. This compares to the Medical - Biomedical and Genetics industry's yield of 0% and the S&P 500's yield of 1.40%. The company's annualized dividend growth in the past year was 3.33%. Check Bristol Myers Squibb dividend history here>>>

Independent Bank Corp. (INDB) is paying out a dividend of $0.59 per share at the moment, with a dividend yield of 3.12% compared to the Banks - Northeast industry's yield of 2.13% and the S&P 500's yield. The annualized dividend growth of the company was 3.51% over the past year. Check Independent Bank Corp. dividend history here>>>

Currently paying a dividend of $0.09 per share, Sunstone Hotel Investors (SHO) has a dividend yield of 3.98%. This is compared to the REIT and Equity Trust - Other industry's yield of 4.71% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 20%. Check Sunstone Hotel Investors dividend history here>>>

But aren't stocks generally more risky than bonds?

Overall, that is true. But stocks are a broad class, and you can reduce the risks significantly by selecting high-quality dividend stocks that can generate regular, predictable income and can also decrease the volatility of your portfolio compared to the overall 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 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

Seeking steady, consistent income through dividends can be a smart option for financial security in retirement, whether you invest in mutual funds, ETFs, or in dividend-paying stocks.

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

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