3 Top Dividend Stocks to Maximize Your Retirement Income - June 02, 2020

Zacks Equity Research

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.

Retirement investing approaches of the past don't work today.

Years ago, investors at or close to retirement could put money into fixed-income assets and depend on appealing yields to generate consistent, solid pay streams to fund a comfortable retirement. 10-year Treasury bond rates in the late 1990s floated around 6.50%, but unfortunately, those days of being able to exclusively rely on Treasury yields to fund retirement income are over.

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's a retiree to do? You could cut your expenses to the bone, and take the risk that your Social Security checks don't shrink. Or you could find an alternative investment that provides a steady, higher-rate income stream to replace dwindling bond yields.

Invest in Dividend Stocks

As we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant current low risk, low yielding Treasury and fixed-income alternatives.

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.

Donegal Group (DGICA) is currently shelling out a dividend of $0.15 per share, with a dividend yield of 4.26%. This compares to the Insurance - Property and Casualty industry's yield of 1.55% and the S&P 500's yield of 1.97%. In terms of dividend growth, the company's current annualized dividend of $0.6 is up 1.75% from last year.

Highwoods Properties (HIW) is paying out a dividend of 0.48 per share at the moment, with a dividend yield of 4.89% compared to the REIT and Equity Trust - Other industry's yield of 4.63% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.92 is up 1.05% from last year.

Currently paying a dividend of 1.07 per share, Kimberly-Clark (KMB) has a dividend yield of 3.03%. This is compared to the Consumer Products - Staples industry's yield of 0% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $4.28 is up 3.88% from last year.

But aren't stocks generally more risky than bonds?

Overall, that is true. But stocks are a broad class, and you can reduce the risks significantly by selecting high-quality dividend stocks that can generate regular, predictable income and can also decrease the volatility of your portfolio compared to the overall stock market.

An advantage of owning dividend stocks for your retirement nest egg is that numerous companies, particularly blue chip stocks, raise their dividends over time, helping alleviate the impact of inflation on your potential retirement income.

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.

Bottom Line

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:

Will You Retire a Multi-Millionaire? 7 Things You Can Do Now


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Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
 
KimberlyClark Corporation (KMB) : Free Stock Analysis Report
 
Highwoods Properties, Inc. (HIW) : Free Stock Analysis Report
 
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