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

Here's a revealing data point: older Americans are scared more of outliving wealth than of death itself.

And retirees have good reason to be worried about making their assets last. People are living longer, so that money has to cover a longer period. Making matters worse, income generated using tried-and-true retirement planning approaches may not cover expenses these days. That means seniors must dip into principal to meet living expenses.

Retirement investing approaches of the past don't work today.

In the past, investors going into retirement could invest in bonds and count on attractive yields to produce steady, reliable income streams to fund a predictable retirement. 10-year Treasury bond rates in the late 1990s hovered around 6.50%, whereas the current rate is much lower.

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.

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.

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.

Cal-Maine Foods (CALM)

is currently shelling out a dividend of $3.46 per share, with a dividend yield of 14.88%. This compares to the Agriculture - Products industry's yield of 0% and the S&P 500's yield of 1.6%. The company's annualized dividend growth in the past year was 1183.62%. Check Cal-Maine Foods dividend history here>>>

Exelon (EXC)

is paying out a dividend of $0.4 per share at the moment, with a dividend yield of 3.44% compared to the Utility - Electric Power industry's yield of 3.03% and the S&P 500's yield. The annualized dividend growth of the company was 5.26% over the past year. Check Exelon dividend history here>>>

Currently paying a dividend of $0.14 per share,

First Commonwealth Financial (FCF)

has a dividend yield of 3.27%. This is compared to the Banks - Northeast industry's yield of 2.59% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 4%. Check First Commonwealth Financial 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.

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

Whether you select high-quality, low-fee funds or stocks, seeking the steady income of dividend-paying equities can potentially offer you a path to a better and more stress-free retirement.

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Cal-Maine Foods, Inc. (CALM): Free Stock Analysis Report
 
Exelon Corporation (EXC): Free Stock Analysis Report
 
First Commonwealth Financial Corporation (FCF): Free Stock Analysis Report

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

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