Believe it or not, seniors fear running out of cash more than they fear dying.
And older Americans have legitimate reasons for this worry, even if they have dutifully saved for their golden years. That's because the traditional ways people manage retirement may no longer provide enough income to meet expenses - and with people generally living longer, the principal retirement savings is exhausted far too early in the retirement period.
Retirement investing approaches of the past don't work today.
Years ago, investors at or close to retirement could put money into fixed-income assets and depend on appealing yields to generate consistent, solid pay streams to fund a comfortable retirement. 10-year Treasury bond rates in the late 1990s floated around 6.50%, but unfortunately, those days of being able to exclusively rely on Treasury yields to fund retirement income are over.
The effect of this drop in rates is substantial: over 20 years, the change in yield for a $1 million investment in 10-year Treasuries is over $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
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.
Going beyond those familiar names, you can find excellent dividend-paying stocks by following a few guidelines. Look for companies that pay a dividend yield of around 3%, with positive annual dividend growth. The growth rate is key to help combat the effects of inflation.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
BankUnited, Inc. (BKU)
is currently shelling out a dividend of $0.31 per share, with a dividend yield of 3.26%. This compares to the Banks - Major Regional industry's yield of 3.33% and the S&P 500's yield of 1.52%. The company's annualized dividend growth in the past year was 6.9%. Check BankUnited, Inc. dividend history here>>>
COPT Defense (CDP)
is paying out a dividend of $0.31 per share at the moment, with a dividend yield of 4.3% compared to the REIT and Equity Trust - Other industry's yield of 4.72% and the S&P 500's yield. The annualized dividend growth of the company was 3.39% over the past year. Check COPT Defense dividend history here>>>
Currently paying a dividend of $0.09 per share,
TIM S.A. Sponsored ADR (TIMB)
has a dividend yield of 3.73%. This is compared to the Wireless Non-US industry's yield of 1.56% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 125.63%. Check TIM S.A. Sponsored ADR 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'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
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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BankUnited, Inc. (BKU): Free Stock Analysis Report TIM S.A. Sponsored ADR (TIMB): Free Stock Analysis Report COPT Defense Properties (CDP): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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