Here's an eye-opening statistic: older Americans are more afraid of running out of money 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.
Retirement investing approaches of the past don't work today.
For many years, bonds or other fixed-income assets could produce the yield needed to provide solid income for retirement needs. However, these yields have dwindled over time: 10-year Treasury bond rates in the late 1990s were around 6.50%, but today, that rate is a thing of the past, with a slim likelihood of rates making a comeback in the foreseeable future.
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.
Unfortunately, it looks like the two traditional sources of retirement income - bonds and Social Security - may not be able to adequately meet the needs of present and future retirees. But what if there was another option that could provide a steady, reliable source of income in retirement?
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 (NYSE:T) and Coca-Cola (NYSE:KO) 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.
General Mills (NYSE:GIS) is currently shelling out a dividend of $0.49 per share, with a dividend yield of 3.75%. This compares to the Food - Miscellaneous industry's yield of 0.25% and the S&P 500's yield of 1.8%. In terms of dividend growth, the company's current annualized dividend of $1.96 is flat compared to last year.
Mercantile Bank (MBWM) is paying out a dividend of 0.27 per share at the moment, with a dividend yield of 3.07% compared to the Banks - Midwest industry's yield of 2.28% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.08 is up 8% from last year.
Currently paying a dividend of 7.59 per share, NetEase (NASDAQ:NTES) has a dividend yield of 5.05%. This is compared to the Internet - Software and Services industry's yield of 0% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $16.55 is up 824.58% 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.
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
Seeking steady, consistent income through dividends can be a smart option for financial security in retirement, whether you invest in mutual funds, ETFs, or in dividend-paying stocks.
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
This helpful guide offers our viewpoints about strategic retirement investment planning, based on decades of experience helping our clients prepare for financial security during their golden years. Get Your FREE Guide Now
General Mills, Inc. (GIS): Free Stock Analysis Report
NetEase, Inc. (NTES): Free Stock Analysis Report
Mercantile Bank Corporation (MBWM): Free Stock Analysis Report
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Zacks Investment Research