3 Top-Ranked Dividend Stocks: A Smarter Way to Boost Your Retirement Income - September 30, 2020

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 example, 10-year Treasury bonds in the late 1990s offered a yield of around 6.50%, which translated to an income source you could count on. However, today's yield is much lower - currently under 2% and probably not a viable return option to fund typical retirements.

The impact of this rate decline is sizeable: over 20 years, the difference in yield for a $1 million investment in 10-year Treasuries is 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

We feel that these dividend-paying equities - as long as they are from high-quality, low-risk issuers - can give retirement investors a smart option to replace low-yielding Treasury bonds (or other bonds).

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.

Federated Hermes (FHI) is currently shelling out a dividend of $0.27 per share, with a dividend yield of 5.07%. This compares to the Financial - Investment Management industry's yield of 2.18% and the S&P 500's yield of 1.66%. In terms of dividend growth, the company's current annualized dividend of $1.08 is flat compared to last year.

FNF Group (FNF) is paying out a dividend of 0.33 per share at the moment, with a dividend yield of 4.26% compared to the Insurance - Property and Casualty industry's yield of 1.32% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $1.32 is up 6.45% from last year.

Currently paying a dividend of 0.3 per share, Horace Mann (HMN) has a dividend yield of 3.58%. This is compared to the Insurance - Multi line industry's yield of 2.8% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $1.2 is up 4.35% 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

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:

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Federated Hermes, Inc. (FHI) : Free Stock Analysis Report
 
Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
 
Horace Mann Educators Corporation (HMN) : Free Stock Analysis Report
 
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