Improve Your Retirement Income with These 3 Top-Ranked Dividend Stocks

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.

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 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.

A rule of thumb for finding solid income-producing stocks is to seek those that average 3% dividend yield, and positive yearly dividend growth. These stocks can help combat inflation by boosting dividends over time.

Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.

Devon Energy (DVN) is currently shelling out a dividend of $0.32 per share, with a dividend yield of 3.00%. This compares to the Oil and Gas - Exploration and Production - United States industry's yield of 0% and the S&P 500's yield of 1.45%. The company's annualized dividend growth in the past year was 9.09%. Check Devon Energy dividend history here>>>

Korn/Ferry (KFY) is paying out a dividend of $0.55 per share at the moment, with a dividend yield of 3.12% compared to the Staffing Firms industry's yield of 1.67% and the S&P 500's yield. The annualized dividend growth of the company was 45.45% over the past year. Check Korn/Ferry dividend history here>>>

Currently paying a dividend of $0.50 per share, Repsol SA (REPYY) has a dividend yield of 3.73%. This is compared to the Oil and Gas - Integrated - International industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 11.53%. Check Repsol SA dividend history here>>>

But aren't stocks generally more risky than bonds?

It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader 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.

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

Whether you select high-quality, low-fee funds or stocks, seeking the steady income of dividend-paying equities can potentially offer you a path to a better and more stress-free retirement.

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This article originally published on Zacks Investment Research (zacks.com).

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