3 Top Dividend Stocks to Maximize Your Retirement Income
Here's a revealing data point: older Americans are scared more of outliving wealth than of death itself.
And retirees have good reason to be worried about making their assets last. People are living longer, so that money has to cover a longer period. Making matters worse, income generated using tried-and-true retirement planning approaches may not cover expenses these days. That means seniors must dip into principal to meet living expenses.
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 the current rate is much lower.
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
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).
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.
Northrim BanCorp (NRIM) is currently shelling out a dividend of $0.61 per share, with a dividend yield of 5.06%. This compares to the Banks - West industry's yield of 2.7% and the S&P 500's yield of 1.58%. The company's annualized dividend growth in the past year was 20%. Check Northrim BanCorp (NRIM) dividend history here>>>
Prosperity Bancshares (PB) is paying out a dividend of $0.56 per share at the moment, with a dividend yield of 3.58% compared to the Banks - Southwest industry's yield of 0.25% and the S&P 500's yield. The annualized dividend growth of the company was 1.82% over the past year. Check Prosperity Bancshares (PB) dividend history here>>>
Currently paying a dividend of $0.69 per share, Principal Financial (PFG) has a dividend yield of 3.46%. This is compared to the Financial - Investment Management industry's yield of 1.97% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 4.69%. Check Principal Financial (PFG) dividend history here>>>
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 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
Regardless of whether you select high-quality, low-fee funds or stocks, looking for a steady stream of income from dividend-paying equities can potentially lead you to a solid and more peaceful retirement.
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Northrim BanCorp Inc (NRIM) : Free Stock Analysis Report
Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Prosperity Bancshares, Inc. (PB) : Free Stock Analysis Report
