Improve Your Retirement Income with These 3 Top-Ranked Dividend Stocks

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.

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 and probably not a viable return option to fund typical retirements.

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

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.

Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.

One way to identify suitable candidates is to look for stocks with an average dividend yield of 3%, and positive average annual dividend growth. Many stocks increase dividends over time, helping to offset the effects of inflation.

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

Amdocs (DOX) is currently shelling out a dividend of $0.57 per share, with a dividend yield of 3.45%. This compares to the Computers - IT Services industry's yield of 0% and the S&P 500's yield of 1.47%. The company's annualized dividend growth in the past year was 10.02%. Check Amdocs dividend history here>>>

First Industrial Realty Trust (FR) is paying out a dividend of $0.50 per share at the moment, with a dividend yield of 3.42% compared to the REIT and Equity Trust - Other industry's yield of 4.94% and the S&P 500's yield. The annualized dividend growth of the company was 20.27% over the past year. Check First Industrial Realty Trust dividend history here>>>

Currently paying a dividend of $0.25 per share, InvenTrust Properties Corp. (IVT) has a dividend yield of 3.25%. This is compared to the REIT and Equity Trust - Other industry's yield of 4.94% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.04%. Check InvenTrust Properties Corp. 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 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

Whether you select high-quality, low-fee funds or stocks, seeking the steady income of dividend-paying equities can potentially offer you a path to a better and more stress-free retirement.

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Amdocs Limited (DOX): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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