Believe it or not, seniors fear running out of cash more than they fear dying.
And unfortunately, even retirees who have built a nest egg have good reason to be concerned - with the traditional approaches to retirement planning, income may no longer cover expenses. That means retirees are dipping into principal to make ends meet, setting up a race against time between dwindling investment balances and longer lifespans.
The tried-and-true retirement investing approach of yesterday doesn'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.
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
As a replacement for low yielding Treasury bonds (and other bond options), we believe dividend-paying stocks from high quality companies offer low risk and stable, predictable income investors in retirement seek.
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.
OceanFirst Financial ( is currently shelling out a dividend of $0.2 per share, with a dividend yield of 3.38%. This compares to the Financial - Savings and Loan industry's yield of 2.44% and the S&P 500's yield of 1.64%. The company's annualized dividend growth in the past year was 17.65%. OCFC Quick Quote OCFC - Free Report) Check OceanFirst Financial ( OCFC Quick Quote OCFC - Free Report) dividend history here>>> Pfizer ( is paying out a dividend of $0.4 per share at the moment, with a dividend yield of 3.38% compared to the Large Cap Pharmaceuticals industry's yield of 2.56% and the S&P 500's yield. The annualized dividend growth of the company was 2.56% over the past year. PFE Quick Quote PFE - Free Report) Check Pfizer ( PFE Quick Quote PFE - Free Report) dividend history here>>>
Currently paying a dividend of $0.97 per share,
Phillips 66 ( has a dividend yield of 3.65%. This is compared to the Oil and Gas - Refining and Marketing industry's yield of 1.95% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 7.78%. PSX Quick Quote PSX - Free Report) Check Phillips 66 ( PSX Quick Quote PSX - Free Report) dividend history here>>> But aren't stocks generally more risky than bonds?
The fact is that stocks, as an asset class, carry more risk than bonds. To counterbalance this, invest in superior quality dividend stocks that not only can grow over time but more significantly, can also decrease your overall portfolio volatility with respect to the broader stock market.
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.
You may be thinking, "I like this dividend strategy, but instead of investing in individual stocks, I'm going to find a dividend-focused mutual fund or ETF." This approach can make sense, but be aware that some mutual funds and specialized ETFs carry high fees, which may reduce your dividend gains or income, and defeat the goal of this dividend investment approach. If you do wish to invest in a fund, do your research to find the best-quality dividend funds with the lowest fees.
Pursuing a dividend investing strategy can help protect your retirement portfolio. Whether you choose to invest in stocks or through low-fee mutual funds or ETFs, this approach can potentially help you achieve a more secure and enjoyable retirement.