Back to top

Image: Bigstock

3 Top Dividend Stocks to Maximize Your Retirement Income

Read MoreHide Full Article

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.

Your parents' retirement investing plan won't cut it 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.

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.

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

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.

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.

Federated Hermes (FHI - Free Report) is currently shelling out a dividend of $0.28 per share, with a dividend yield of 3.13%. This compares to the Financial - Investment Management industry's yield of 1.91% and the S&P 500's yield of 1.57%. The company's annualized dividend growth in the past year was 3.7%. Check Federated Hermes (FHI - Free Report) dividend history here>>>

M.D.C. Holdings, Inc. is paying out a dividend of $0.55 per share at the moment, with a dividend yield of 3.53% compared to the Building Products - Home Builders industry's yield of 0.71% and the S&P 500's yield. The annualized dividend growth of the company was 10% over the past year. Check M.D.C. Holdings, Inc. dividend history here>>>

Currently paying a dividend of $0.56 per share, Prosperity Bancshares (PB - Free Report) has a dividend yield of 3.49%. This is compared to the Banks - Southwest industry's yield of 0% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 1.82%. Check Prosperity Bancshares (PB - Free Report) dividend history here>>>

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.

A silver lining to owning dividend stocks for your retirement portfolio is that many companies, especially blue chip stocks, increase their dividends over time, helping offset the effects of inflation on your potential retirement income.

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.

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.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Prosperity Bancshares, Inc. (PB) - free report >>

Federated Hermes, Inc. (FHI) - free report >>

Published in