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.
In today's economic environment, traditional income investments are not working.
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.
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.
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
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.
Horace Mann (HMN)
is currently shelling out a dividend of $0.35 per share, with a dividend yield of 3.24%. This compares to the Insurance - Multi line industry's yield of 1.22% and the S&P 500's yield of 1.6%. The company's annualized dividend growth in the past year was 2.94%. Check Horace Mann dividend history here>>>
New Jersey Resources (NJR)
is paying out a dividend of $0.45 per share at the moment, with a dividend yield of 3.98% compared to the Utility - Gas Distribution industry's yield of 3.26% and the S&P 500's yield. The annualized dividend growth of the company was 7.14% over the past year. Check New Jersey Resources dividend history here>>>
Currently paying a dividend of $0.51 per share,
First Financial Corp. (THFF)
has a dividend yield of 3.87%. This is compared to the Banks - Midwest industry's yield of 3.03% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 13.33%. Check First Financial Corp. dividend history here>>>
But aren't stocks generally more risky than bonds?
It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader stock market.
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
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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Horace Mann Educators Corporation (HMN): Free Stock Analysis Report NewJersey Resources Corporation (NJR): Free Stock Analysis Report First Financial Corporation Indiana (THFF): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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