3 Top Dividend Stocks to Maximize Your Retirement Income - August 03, 2020

Zacks Equity Research
·5-min read

Strange but true: seniors fear death less than running out of money in retirement.

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.

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

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

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.

Going beyond those familiar names, you can find excellent dividend-paying stocks by following a few guidelines. Look for companies that pay a dividend yield of around 3%, with positive annual dividend growth. The growth rate is key to help combat the effects of inflation.

Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.

Atlas (ATCO) is currently shelling out a dividend of $0.13 per share, with a dividend yield of 7.03%. This compares to the Financial - Investment Management industry's yield of 2.38% and the S&P 500's yield of 1.83%. In terms of dividend growth, the company's current annualized dividend of $0.5 is flat compared to last year.

CVS Health (CVS) is paying out a dividend of 0.5 per share at the moment, with a dividend yield of 3.18% compared to the Retail - Pharmacies and Drug Stores industry's yield of 0% and the S&P 500's yield. Taking a look at the company's dividend growth, its current annualized dividend of $2 is flat compared to last year.

Currently paying a dividend of 0.15 per share, Donegal Group (DGICA) has a dividend yield of 4.29%. This is compared to the Insurance - Property and Casualty industry's yield of 1.37% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $0.6 is up 3.45% from 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.

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.

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

Seeking steady, consistent income through dividends can be a smart option for financial security in retirement, whether you invest in mutual funds, ETFs, or in dividend-paying stocks.

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


This helpful guide offers our viewpoints about strategic retirement investment planning, based on decades of experience helping our clients prepare for financial security during their golden years. Get Your FREE Guide Now
 
Seaspan Corporation (ATCO) : Free Stock Analysis Report
 
CVS Health Corporation (CVS) : Free Stock Analysis Report
 
Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
 
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