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3 Top Dividend Stocks to Maximize Your Retirement Income - July 15, 2020

Here's an eye-opening statistic: older Americans are more afraid of running out of money than of death itself.

Also, retirees who have constructed a nest egg have valid justifications to be concerned, since the traditional ways to plan for retirement may mean income can no longer cover expenses. Some retirees are now tapping their principal to make a decent living, pressed for time between decreasing investment balances and longer life expectancies.

Retirement investing approaches of the past don't work 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 at the time of this article, the current rate is under 2% and looks to stay low thanks to an accommodative Fed.

The impact of this rate decline is sizeable: over 20 years, the difference in yield for a $1 million investment in 10-year Treasuries is more than $1 million.

And lower bond yields aren't the only potential problem seniors are facing. Today's retirees aren't feeling as secure as they once did about Social Security, either. Benefit checks will still be coming for the foreseeable future, but based on current estimates, Social Security funds 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 current low risk, low yielding Treasury and fixed-income alternatives.

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.

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.

Gain Capital (GCAP) is currently shelling out a dividend of $0.06 per share, with a dividend yield of 3.93%. This compares to the Financial - Investment Bank industry's yield of 0.29% and the S&P 500's yield of 1.86%. In terms of dividend growth, the company's current annualized dividend of $0.24 is flat compared to last year.

Horace Mann (HMN) is paying out a dividend of 0.3 per share at the moment, with a dividend yield of 3.19% compared to the Insurance - Multi line industry's yield of 2.62% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.2 is up 4.35% from last year.

Currently paying a dividend of 0.46 per share, Prosperity Bancshares (PB) has a dividend yield of 3.42%. This is compared to the Banks - Southwest industry's yield of 1.74% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $1.84 is up 12.2% from last year.

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.

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

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.

Generating income is just one aspect of planning for a comfortable retirement.

To learn more ways to maximize your assets - and avoid pitfalls that could jeopardize your financial security - download our free report:

Will You Retire a Multi-Millionaire? 7 Things You Can Do Now


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GAIN Capital Holdings, Inc. (GCAP): Free Stock Analysis Report

Prosperity Bancshares, Inc. (PB): Free Stock Analysis Report

Horace Mann Educators Corporation (HMN): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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