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.

Also, retirees who have constructed a nest egg have valid justifications to be concerned, since the traditional ways to plan for retirement may mean income can no longer cover expenses. Some retirees are now tapping their principal to make a decent living, pressed for time between decreasing investment balances and longer life expectancies.

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

That means if you had $1 million in 10-year Treasuries, the difference in yield between 1999 and today is more than $1 million.

Today's retirees are getting hit hard by reduced bond yields - and the Social Security picture isn't too rosy either. Right now and for the near future, Social Security benefits are still being paid, but it has been estimated that the Social Security funds will be depleted as soon as 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

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.

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.

First American Financial (FAF)

is currently shelling out a dividend of $0.54 per share, with a dividend yield of 3.65%. This compares to the Insurance - Property and Casualty industry's yield of 0.14% and the S&P 500's yield of 1.53%. The company's annualized dividend growth in the past year was 1.89%. Check First American Financial dividend history here>>>

GSK (GSK)

is paying out a dividend of $0.42 per share at the moment, with a dividend yield of 4.39% compared to the Medical - Biomedical and Genetics industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 0.68% over the past year. Check GSK dividend history here>>>

Currently paying a dividend of $0.15 per share,

SB Financial Group, Inc. (SBFG)

has a dividend yield of 3.03%. This is compared to the Banks - Northeast industry's yield of 2.46% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 7.41%. Check SB Financial Group, Inc. dividend history here>>>

But aren't stocks generally more risky than bonds?

The fact is that stocks, as an asset class, carry more risk than bonds. To counterbalance this, invest in superior quality dividend stocks that not only can grow over time but more significantly, can also decrease your overall portfolio volatility with respect to the broader 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

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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First American Financial Corporation (FAF): Free Stock Analysis Report
 
GSK PLC Sponsored ADR (GSK): Free Stock Analysis Report
 
SB Financial Group, Inc. (SBFG): Free Stock Analysis Report

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

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