Strange but true: seniors fear death less than running out of money in retirement.
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.
The tried-and-true retirement investing approach of yesterday doesn't work today.
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.
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.
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's a retiree to do? You could cut your expenses to the bone, and take the risk that your Social Security checks don't shrink. Or you could find an alternative investment that provides a steady, higher-rate income stream to replace dwindling bond yields.
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.
First Commonwealth Financial (FCF)
is currently shelling out a dividend of $0.14 per share, with a dividend yield of 3.36%. This compares to the Banks - Northeast industry's yield of 2.46% and the S&P 500's yield of 1.53%. The company's annualized dividend growth in the past year was 4%. Check First Commonwealth Financial dividend history here>>>
Perrigo (PRGO)
is paying out a dividend of $0.29 per share at the moment, with a dividend yield of 4.23% compared to the Medical - Products industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 5.07% over the past year. Check Perrigo dividend history here>>>
Currently paying a dividend of $0.31 per share,
Standard Motor Products (SMP)
has a dividend yield of 4.18%. This is compared to the Automotive - Replacement Parts industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 6.9%. Check Standard Motor Products 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.
An upside to adding dividend stocks to your retirement portfolio: they can help lessen the effects of inflation, since many dividend-paying companies (especially blue chip stocks) generally increase their dividends over time.
Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.
If you're interested in investing in dividends, but are thinking about mutual funds or ETFs rather than stocks, beware of fees. Mutual funds and specialized ETFs may carry high fees, which could lower the overall gains you earn from dividends, undercutting your dividend income strategy. Be sure to look for funds with low fees if you decide on this approach.
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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First Commonwealth Financial Corporation (FCF): Free Stock Analysis Report Standard Motor Products, Inc. (SMP): Free Stock Analysis Report Perrigo Company plc (PRGO): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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