Strange but true: seniors fear death less than running out of money in retirement.
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.
Your parents' retirement investing plan won't cut it 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.
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.
So what can retirees do? You could dramatically reduce your expenses, and go out on a limb hoping your Social Security benefits don't diminish. On the other hand, you could opt for an alternative investment that gives a steady, higher-rate income stream to supplant lessening bond yields.
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 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.
Federal Agricultural Mortgage (AGM)
is currently shelling out a dividend of $1.5 per share, with a dividend yield of 3.19%. This compares to the Financial - Mortgage & Related Services industry's yield of 0% and the S&P 500's yield of 1.56%. The company's annualized dividend growth in the past year was 7.14%. Check Federal Agricultural Mortgage dividend history here>>>
NBT Bancorp (NBTB)
is paying out a dividend of $0.34 per share at the moment, with a dividend yield of 3.19% compared to the Banks - Northeast industry's yield of 2.58% and the S&P 500's yield. The annualized dividend growth of the company was 6.25% over the past year. Check NBT Bancorp dividend history here>>>
Currently paying a dividend of $0.29 per share,
Old Republic International (ORI)
has a dividend yield of 3.07%. This is compared to the Insurance - Multi line industry's yield of 1.59% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 9.43%. Check Old Republic International 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.
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'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
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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Federal Agricultural Mortgage Corporation (AGM): Free Stock Analysis Report Old Republic International Corporation (ORI): Free Stock Analysis Report NBT Bancorp Inc. (NBTB): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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