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.
The tried - and - true retirement investing approach of yesterday doesn't work today.
For example, 10-year Treasury bonds in the late 1990s offered a yield of around 6.50%, which translated to an income source you could count on. However, today's yield is much lower - currently under 2% and probably not a viable return option to fund typical retirements.
While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of more than $1 million.
Today's retirees are getting hit hard by reduced bond yields - and the Social Security picture isn't too rosy either. Right now and for the near future, Social Security benefits are still being paid, but it has been estimated that the Social Security funds will be depleted as soon as 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 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.
Foot Locker (FL) is currently shelling out a dividend of $0.38 per share, with a dividend yield of 3.71%. This compares to the Retail - Apparel and Shoes industry's yield of 0% and the S&P 500's yield of 1.81%. In terms of dividend growth, the company's current annualized dividend of $1.52 is up 10.14% from last year.
Invesco (IVZ) is paying out a dividend of 0.31 per share at the moment, with a dividend yield of 7.01% compared to the Financial - Investment Management industry's yield of 2.37% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.24 is up 3.33% from last year.
Currently paying a dividend of 0.16 per share, Regions Financial (RF) has a dividend yield of 3.7%. This is compared to the Banks - Southeast industry's yield of 1.8% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $0.62 is up 10.71% 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.
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're thinking, "I want to invest in a dividend-focused ETF or mutual fund," make sure to do your homework. It's important to know that some mutual funds and specialized ETFs charge high fees, which may diminish your dividend gains or income and thwart the overall objective of this investment strategy. If you do want to invest in fund, research well to identify the best-quality dividend funds with the least charges.
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:
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Foot Locker, Inc. (FL) : Free Stock Analysis Report
Regions Financial Corporation (RF) : Free Stock Analysis Report
Invesco Ltd. (IVZ) : Free Stock Analysis Report
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