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.
In today's economic environment, traditional income investments are not working.
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.
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.
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 we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant low risk, low yielding Treasury and fixed-income alternatives.
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.
ACNB (ACNB)
is currently shelling out a dividend of $0.34 per share, with a dividend yield of 3.27%. This compares to the Banks - Southwest industry's yield of 0.91% and the S&P 500's yield of 1.54%. The company's annualized dividend growth in the past year was 6.67%. Check ACNB dividend history here>>>
Comcast (CMCSA)
is paying out a dividend of $0.33 per share at the moment, with a dividend yield of 3.81% compared to the Cable Television industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 6.9% over the past year. Check Comcast dividend history here>>>
Currently paying a dividend of $0.19 per share,
Nomura Holdings (NMR)
has a dividend yield of 6.17%. This is compared to the Financial - Investment Bank industry's yield of 0.62% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 67.73%. Check Nomura Holdings 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 prefer investing in funds or ETFs compared to individual stocks, you can still pursue a dividend income strategy. However, it's important to know the fees charged by each fund or ETF, which can ultimately reduce your dividend income, working against your strategy. Do your homework and make sure you know the fees charged by any fund before you invest.
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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ACNB Corporation (ACNB): Free Stock Analysis Report Comcast Corporation (CMCSA): Free Stock Analysis Report Nomura Holdings Inc ADR (NMR): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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