3 Top-Ranked Dividend Stocks: A Smarter Way to Boost Your Retirement Income - September 22, 2020

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

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.

In today's economic environment, traditional income investments are not working.

Years ago, investors at or close to retirement could put money into fixed-income assets and depend on appealing yields to generate consistent, solid pay streams to fund a comfortable retirement. 10-year Treasury bond rates in the late 1990s floated around 6.50%, but unfortunately, those days of being able to exclusively rely on Treasury yields to fund retirement income are over.

That means if you had $1 million in 10-year Treasuries, the difference in yield between 1999 and today is more than $1 million.

And lower bond yields aren't the only potential problem seniors are facing. Today's retirees aren't feeling as secure as they once did about Social Security, either. Benefit checks will still be coming for the foreseeable future, but based on current estimates, Social Security funds will run out of money in 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.

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.

ALERUS FINL CP (ALRS) is currently shelling out a dividend of $0.15 per share, with a dividend yield of 3.17%. This compares to the Financial - Miscellaneous Services industry's yield of 0% and the S&P 500's yield of 1.7%. In terms of dividend growth, the company's current annualized dividend of $0.6 is up 7.14% from last year.

Donegal Group (DGICA) is paying out a dividend of 0.15 per share at the moment, with a dividend yield of 4.22% 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 $0.6 is up 3.45% from last year.

Currently paying a dividend of 0.27 per share, Federated Hermes (FHI) has a dividend yield of 5.1%. This is compared to the Financial - Investment Management industry's yield of 1.93% and the S&P 500's current yield. Looking at dividend growth, the company's current annualized dividend of $1.08 is flat compared to last year.

But aren't stocks generally more risky than bonds?

It is true that stocks, as an asset class, carry more risk than bonds, but high-quality dividend stocks not only have the ability to produce income growth over time but more importantly, can also reduce your overall portfolio volatility relative to the broader 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.

If you prefer investing in funds or ETFs compared to individual stocks, you can still pursue a dividend income strategy. However, it's important to know the fees charged by each fund or ETF, which can ultimately reduce your dividend income, working against your strategy. Do your homework and make sure you know the fees charged by any fund before you invest.

Bottom Line

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.

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

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ALERUS FINL CP (ALRS) : Free Stock Analysis Report
 
Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
 
Federated Hermes, Inc. (FHI) : Free Stock Analysis Report
 
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