Believe it or not, seniors fear running out of cash more than they fear dying.
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.
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.
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 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.
A rule of thumb for finding solid income-producing stocks is to seek those that average 3% dividend yield, and positive yearly dividend growth. These stocks can help combat inflation by boosting dividends over time.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
New Jersey Resources (NJR)
is currently shelling out a dividend of $0.45 per share, with a dividend yield of 3.66%. This compares to the Utility - Gas Distribution industry's yield of 3.21% and the S&P 500's yield of 1.65%. The company's annualized dividend growth in the past year was 7.14%. Check New Jersey Resources dividend history here>>>
Principal Financial (PFG)
is paying out a dividend of $0.76 per share at the moment, with a dividend yield of 4.06% compared to the Insurance - Multi line industry's yield of 1.63% and the S&P 500's yield. The annualized dividend growth of the company was 8.7% over the past year. Check Principal Financial dividend history here>>>
Currently paying a dividend of $0.29 per share,
Tanger (SKT)
has a dividend yield of 3.41%. This is compared to the REIT and Equity Trust - Retail industry's yield of 4.22% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.77%. Check Tanger dividend history here>>>
But aren't stocks generally more risky than bonds?
It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader stock market.
An advantage of owning dividend stocks for your retirement nest egg is that numerous companies, particularly blue chip stocks, raise their dividends over time, helping alleviate the impact 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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NewJersey Resources Corporation (NJR): Free Stock Analysis Report Principal Financial Group, Inc. (PFG): Free Stock Analysis Report Tanger Inc. (SKT): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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