Strange but true: seniors fear death less than running out of money in retirement.
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.
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 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.
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 a replacement for low yielding Treasury bonds (and other bond options), we believe dividend-paying stocks from high quality companies offer low risk and stable, predictable income investors in retirement seek.
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.
Phillips Edison & Company, Inc. (PECO) is currently shelling out a dividend of $0.11 per share, with a dividend yield of 3.08%. This compares to the REIT and Equity Trust - Retail industry's yield of 3.72% and the S&P 500's yield of 1.42%. The company's annualized dividend growth in the past year was 5.13%. Check Phillips Edison & Company, Inc. dividend history here>>>
Regions Financial (RF) is paying out a dividend of $0.27 per share at the moment, with a dividend yield of 3.50% compared to the Banks - Southeast industry's yield of 1.82% and the S&P 500's yield. The annualized dividend growth of the company was 4.17% over the past year. Check Regions Financial dividend history here>>>
Currently paying a dividend of $0.09 per share, Sunstone Hotel Investors (SHO) has a dividend yield of 3.09%. This is compared to the REIT and Equity Trust - Other industry's yield of 3.89% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 20%. Check Sunstone Hotel Investors 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.
An advantage of owning dividend stocks for your retirement nest egg is that numerous companies, particularly blue chip stocks, raise their dividends over time, helping alleviate the impact of inflation on your potential retirement income.
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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Phillips Edison & Company, Inc. (PECO): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).