Back to top

Image: Bigstock

Improve Your Retirement Income with These 3 Top-Ranked Dividend Stocks - May 14, 2020

Read MoreHide Full Article

Believe it or not, seniors fear running out of cash more than they fear dying.

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.

The tried - and - true retirement investing approach of yesterday doesn'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.

In addition to the considerable drop in bond yields, today's retirees are nervous about their future Social Security benefits. Because of certain demographic factors, it's been estimated that the funds that pay the Social Security benefits will run out of money in 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

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.

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.

AbbVie (ABBV - Free Report) is currently shelling out a dividend of $1.18 per share, with a dividend yield of 5.31%. This compares to the Large Cap Pharmaceuticals industry's yield of 2.56% and the S&P 500's yield of 2.23%. In terms of dividend growth, the company's current annualized dividend of $4.72 is up 10.28% from last year.

Merck (MRK - Free Report) is paying out a dividend of 0.61 per share at the moment, with a dividend yield of 3.13% compared to the Large Cap Pharmaceuticals industry's yield of 2.56% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $2.44 is up 10.91% from last year.

Currently paying a dividend of 0.08 per share, Quanex Building Products (NX - Free Report) has a dividend yield of 3.09%. This is compared to the Building Products - Miscellaneous industry's yield of 0% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $0.32 is flat compared to 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.

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.

If you're interested in investing in dividends, but are thinking about mutual funds or ETFs rather than stocks, beware of fees. Mutual funds and specialized ETFs may carry high fees, which could lower the overall gains you earn from dividends, undercutting your dividend income strategy. Be sure to look for funds with low fees if you decide on this approach.

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.

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


In-Depth Zacks Research for the Tickers Above


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


AbbVie Inc. (ABBV) - free report >>

Merck & Co., Inc. (MRK) - free report >>

Quanex Building Products Corporation (NX) - free report >>

Published in