Strange but true: seniors fear death less than running out of money in retirement.
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.
For many years, bonds or other fixed-income assets could produce the yield needed to provide solid income for retirement needs. However, these yields have dwindled over time: 10-year Treasury bond rates in the late 1990s were around 6.50%, but today, that rate is a thing of the past, with a slim likelihood of rates making a comeback in the foreseeable future.
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.
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.
How can you avoid dipping into your principal when the investments you counted on in retirement aren't producing income? You can only cut your expenses so far, and the only other option is to find a different investment vehicle to generate income.
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.
Canadian Imperial Bank (CM)
is currently shelling out a dividend of $0.71 per share, with a dividend yield of 3.92%. This compares to the Banks - Foreign industry's yield of 3.29% and the S&P 500's yield of 1.53%. The company's annualized dividend growth in the past year was 7.01%. Check Canadian Imperial Bank dividend history here>>>
DTE Energy (DTE)
is paying out a dividend of $1.09 per share at the moment, with a dividend yield of 3.32% compared to the Utility - Electric Power industry's yield of 3.28% and the S&P 500's yield. The annualized dividend growth of the company was 6.86% over the past year. Check DTE Energy dividend history here>>>
Currently paying a dividend of $0.42 per share,
GSK (GSK)
has a dividend yield of 4.42%. This is compared to the Medical - Biomedical and Genetics industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 11.89%. Check GSK dividend history here>>>
But aren't stocks generally more risky than bonds?
Yes, that's true. As a broad category, bonds carry less risk than stocks. However, the stocks we are talking about - dividend -paying stocks from high-quality companies - can generate income over time and also mitigate the overall volatility of your portfolio compared to the stock market as a whole.
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.
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
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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Canadian Imperial Bank of Commerce (CM): Free Stock Analysis Report GSK PLC Sponsored ADR (GSK): Free Stock Analysis Report DTE Energy Company (DTE): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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