3 Top-Ranked Dividend Stocks: A Smarter Way to Boost Your Retirement Income - August 26, 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.
The tried - and - true retirement investing approach of yesterday doesn'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 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.
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.
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
We feel that these dividend-paying equities - as long as they are from high-quality, low-risk issuers - can give retirement investors a smart option to replace low-yielding Treasury bonds (or other bonds).
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 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.
Horace Mann (HMN) is currently shelling out a dividend of $0.3 per share, with a dividend yield of 3.1%. This compares to the Insurance - Multi line industry's yield of 2.6% and the S&P 500's yield of 1.65%. In terms of dividend growth, the company's current annualized dividend of $1.2 is up 4.35% from last year.
PSEG (PEG) is paying out a dividend of 0.49 per share at the moment, with a dividend yield of 3.66% compared to the Utility - Electric Power industry's yield of 3.53% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.96 is up 4.26% from last year.
Currently paying a dividend of 0.78 per share, Pinnacle West (PNW) has a dividend yield of 4.2%. This is compared to the Utility - Electric Power industry's yield of 3.53% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $3.13 is up 6.1% 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.
An upside to adding dividend stocks to your retirement portfolio: they can help lessen the effects of inflation, since many dividend-paying companies (especially blue chip stocks) generally increase their dividends over time.
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.
Pursuing a dividend investing strategy can help protect your retirement portfolio. Whether you choose to invest in stocks or through low-fee mutual funds or ETFs, this approach can potentially help you achieve a more secure and enjoyable 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:
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Horace Mann Educators Corporation (HMN): Free Stock Analysis Report
Pinnacle West Capital Corporation (PNW): Free Stock Analysis Report
Public Service Enterprise Group Incorporated (PEG): 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.