Believe it or not, seniors fear running out of cash more than they fear dying.
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.
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.
That means if you had $1 million in 10-year Treasuries, the difference in yield between 1999 and today is 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.
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
Dividend-paying stocks from low-risk, high-quality companies are a smart way to generate steady and reliable attractive income streams to replace current low risk, low yielding Treasury and bond options.
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.
DiamondRock Hospitality (DRH) is currently shelling out a dividend of $0.13 per share, with a dividend yield of 4.61%. This compares to the REIT and Equity Trust - Other industry's yield of 4.19% and the S&P 500's yield of 1.81%. In terms of dividend growth, the company's current annualized dividend of $0.5 is flat compared to last year.
Edison International (EIX) is paying out a dividend of 0.61 per share at the moment, with a dividend yield of 3.31% compared to the Utility - Electric Power industry's yield of 2.96% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $2.45 is up 1.24% from last year.
Currently paying a dividend of 0.14 per share, First Horizon National (FHN) has a dividend yield of 3.41%. This is compared to the Banks - Southeast industry's yield of 1.81% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $0.56 is up 16.67% from last year.
But aren't stocks generally more risky than bonds?
It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader stock market.
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.
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.
Generating income is just one aspect of planning for a comfortable retirement.
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Diamondrock Hospitality Company (DRH) : Free Stock Analysis Report
Edison International (EIX) : Free Stock Analysis Report
First Horizon National Corporation (FHN) : Free Stock Analysis Report
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