Here's a revealing data point: older Americans are scared more of outliving wealth 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.
In today's economic environment, traditional income investments are not working.
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 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.
And lower bond yields aren't the only potential problem seniors are facing. Today's retirees aren't feeling as secure as they once did about Social Security, either. Benefit checks will still be coming for the foreseeable future, but based on current estimates, Social Security funds 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
Dividend-paying stocks from low-risk, high-quality companies are a smart way to generate steady and reliable attractive income streams to replace low risk, low yielding Treasury and bond options.
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.
Kontoor Brands (KTB)
is currently shelling out a dividend of $0.52 per share, with a dividend yield of 3.56%. This compares to the Textile - Apparel industry's yield of 0% and the S&P 500's yield of 1.69%. The company's annualized dividend growth in the past year was 4%. Check Kontoor Brands dividend history here>>>
SB Financial Group, Inc. (SBFG)
is paying out a dividend of $0.15 per share at the moment, with a dividend yield of 3% compared to the Banks - Northeast industry's yield of 2.65% and the S&P 500's yield. The annualized dividend growth of the company was 7.41% over the past year. Check SB Financial Group, Inc. dividend history here>>>
Currently paying a dividend of $1.08 per share,
Smucker (SJM)
has a dividend yield of 3.67%. This is compared to the Food - Miscellaneous industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 1.89%. Check Smucker 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'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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Kontoor Brands, Inc. (KTB): Free Stock Analysis Report The J. M. Smucker Company (SJM): Free Stock Analysis Report SB Financial Group, Inc. (SBFG): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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