Here’s a revealing data point: older Americans are scared more of outliving wealth 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 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 effect of this drop in rates is substantial: over 20 years, the change in yield for a $1 million investment in 10-year Treasuries is over $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.
For example, AT&T and Coca-Cola are income stocks with attractive dividend yields of 3% or better. Look for stocks like this that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.
Going beyond those familiar names, you can find excellent dividend-paying stocks by following a few guidelines. Look for companies that pay a dividend yield of around 3%, with positive annual dividend growth. The growth rate is key to help combat the effects of inflation.
Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.
First Defiance Financial (FDEF) is currently shelling out a dividend of $0.22 per share, with a dividend yield of 3.42%. This compares to the Financial – Savings and Loan industry’s yield of 2.41% and the S&P 500’s yield of 1.92%. In terms of dividend growth, the company’s current annualized dividend of $0.88 is up 29.41% from last year.
Foot Locker (FL) is paying out a dividend of 0.38 per share at the moment, with a dividend yield of 4.43% compared to the Retail – Apparel and Shoes industry’s yield of 0% and the S&P 500’s yield. Taking a look at the company’s dividend growth, its current annualized dividend of $1.52 is up 10.14% from last year.
Currently paying a dividend of 0.48 per share, Highwoods Properties (HIW) has a dividend yield of 3.9%. This is compared to the REIT and Equity Trust – Other industry’s yield of 3.99% and the S&P 500’s current yield. Looking at dividend growth, the company’s current annualized dividend of $1.92 is up 2.7% from last year.
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.
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.
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