Believe it or not, seniors fear running out of cash more than they fear dying.
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.
Your parents' retirement investing plan won't cut it today.
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.
While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of 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
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 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.
Sun Life (SLF)
is currently shelling out a dividend of $0.62 per share, with a dividend yield of 3.86%. This compares to the Insurance - Life Insurance industry's yield of 0.61% and the S&P 500's yield of 1.48%. The company's annualized dividend growth in the past year was 3.17%. Check Sun Life dividend history here>>>Target (TGT)
is paying out a dividend of $1.12 per share at the moment, with a dividend yield of 3.68% compared to the Retail - Discount Stores industry's yield of 0.5% and the S&P 500's yield. The annualized dividend growth of the company was 1.82% over the past year. Check Target dividend history here>>>Currently paying a dividend of $0.04 per share,
Whitestone (WSR)
has a dividend yield of 3.43%. This is compared to the REIT and Equity Trust - Other industry's yield of 4.11% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 3.13%. Check Whitestone dividend history here>>>But aren't stocks generally more risky than bonds?
The fact is that stocks, as an asset class, carry more risk than bonds. To counterbalance this, invest in superior quality dividend stocks that not only can grow over time but more significantly, can also decrease your overall portfolio volatility with respect to the broader 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
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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Free: See Our Top Stock And 4 Runners UpSun Life Financial Inc. (SLF) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
Whitestone REIT (WSR) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
