Investing

3 Top Dividend Stocks to Maximize Your Retirement Income

Zacks Equity Research

Published: July 18, 2023 10:46 pm

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

And retirees have good reason to be worried about making their assets last. People are living longer, so that money has to cover a longer period. Making matters worse, income generated using tried-and-true retirement planning approaches may not cover expenses these days. That means seniors must dip into principal to meet living expenses.

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.

The effect of this drop in rates is substantial: over 20 years, the change in yield for a $1 million investment in 10-year Treasuries is over $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).

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.

Bank OZK (OZK) is currently shelling out a dividend of $0.36 per share, with a dividend yield of 3.45%. This compares to the Banks – Northeast industry’s yield of 3.07% and the S&P 500’s yield of 1.64%. The company’s annualized dividend growth in the past year was 12.9%. Check Bank OZK (OZK) dividend history here>>>

Republic Bancorp (RBCAA) is paying out a dividend of $0.37 per share at the moment, with a dividend yield of 3.42% compared to the Banks – Southeast industry’s yield of 2.78% and the S&P 500’s yield. The annualized dividend growth of the company was 9.68% over the past year. Check Republic Bancorp (RBCAA) dividend history here>>>

Currently paying a dividend of $0.1 per share, TIM S.A. Sponsored ADR (TIMB) has a dividend yield of 4.3%. This is compared to the Wireless Non-US industry’s yield of 0.84% and the S&P 500’s current yield. Annualized dividend growth for the company in the past year was 90.24%. Check TIM S.A. Sponsored ADR (TIMB) dividend history here>>>

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.

Combating the impact of inflation is one advantage of owning these dividend-paying stocks. Here’s why: many of these stable, high-quality companies increase their dividends over time, which translates to rising dividend income that offsets the effects of inflation.

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

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.

Bank OZK (OZK): Free Stock Analysis Report

Republic Bancorp, Inc. (RBCAA): Free Stock Analysis Report

TIM S.A. Sponsored ADR (TIMB): Free Stock Analysis Report

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