Here's an eye-opening statistic: older Americans are more afraid of running out of money 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 impact of this rate decline is sizable: over 20 years, the difference in yield for a $1 million investment in 10-year Treasuries 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.
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
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.
One way to identify suitable candidates is to look for stocks with an average dividend yield of 3%, and positive average annual dividend growth. Many stocks increase dividends over time, helping to offset the effects of inflation.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
Central Pacific Financial (CPF)
is currently shelling out a dividend of $0.27 per share, with a dividend yield of 4.09%. This compares to the Banks - West industry's yield of 2.87% and the S&P 500's yield of 1.6%. The company's annualized dividend growth in the past year was 3.85%. Check Central Pacific Financial dividend history here>>>
Tyson Foods (TSN)
is paying out a dividend of $0.5 per share at the moment, with a dividend yield of 3.62% compared to the Food - Meat Products industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 2.04% over the past year. Check Tyson Foods dividend history here>>>
Currently paying a dividend of $0.41 per share,
PNM Resources (TXNM)
has a dividend yield of 3.08%. This is compared to the Alternative Energy - Other industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.16%. Check PNM Resources 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.
You may be thinking, "I like this dividend strategy, but instead of investing in individual stocks, I'm going to find a dividend-focused mutual fund or ETF." This approach can make sense, but be aware that some mutual funds and specialized ETFs carry high fees, which may reduce your dividend gains or income, and defeat the goal of this dividend investment approach. If you do wish to invest in a fund, do your research to find the best-quality dividend funds with the lowest fees.
Bottom Line
Regardless of whether you select high-quality, low-fee funds or stocks, looking for a steady stream of income from dividend-paying equities can potentially lead you to a solid and more peaceful retirement.
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CPB Inc. (CPF): Free Stock Analysis Report Tyson Foods, Inc. (TSN): Free Stock Analysis Report TXNM Energy, Inc. (TXNM): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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