Here's an eye-opening statistic: older Americans are more afraid of running out of money than of death itself.
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.
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.
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.
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
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.
One way to identify suitable candidates is to look for stocks with an average dividend yield of 3%, and positive average annual dividend growth. Many stocks increase dividends over time, helping to offset the effects of inflation.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
Avient (AVNT)
is currently shelling out a dividend of $0.27 per share, with a dividend yield of 3.14%. This compares to the Chemical - Diversified industry's yield of 2.19% and the S&P 500's yield of 1.52%. The company's annualized dividend growth in the past year was 4.85%. Check Avient dividend history here>>>
Bristol Myers Squibb (BMY)
is paying out a dividend of $0.62 per share at the moment, with a dividend yield of 5.29% compared to the Medical - Biomedical and Genetics industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 3.33% over the past year. Check Bristol Myers Squibb dividend history here>>>
Currently paying a dividend of $0.46 per share,
Community Financial System (CBU)
has a dividend yield of 3.06%. This is compared to the Financial - Miscellaneous Services industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 2.22%. Check Community Financial System 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.
Combating the impact of inflation is one advantage of owning these dividend-paying stocks. Here's why: many of these stable, high-quality companies increase their dividends over time, which translates to rising dividend income that offsets the effects of inflation.
Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.
You may be thinking, "I like this dividend strategy, but instead of investing in individual stocks, I'm going to find a dividend-focused mutual fund or ETF." This approach can make sense, but be aware that some mutual funds and specialized ETFs carry high fees, which may reduce your dividend gains or income, and defeat the goal of this dividend investment approach. If you do wish to invest in a fund, do your research to find the best-quality dividend funds with the lowest fees.
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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Avient Corporation (AVNT): Free Stock Analysis Report Bristol Myers Squibb Company (BMY): Free Stock Analysis Report Community Financial System, Inc. (CBU): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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