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

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

Also, retirees who have constructed a nest egg have valid justifications to be concerned, since the traditional ways to plan for retirement may mean income can no longer cover expenses. Some retirees are now tapping their principal to make a decent living, pressed for time between decreasing investment balances and longer life expectancies.

The tried - and - true retirement investing approach of yesterday doesn't work today.

In the past, investors going into retirement could invest in bonds and count on attractive yields to produce steady, reliable income streams to fund a predictable retirement. 10-year Treasury bond rates in the late 1990s hovered around 6.50%, whereas the current rate is much lower.

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.

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 we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant low risk, low yielding Treasury and fixed-income alternatives.

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.

Grupo Aval Acciones y Valores S.A. (AVAL) is currently shelling out a dividend of $0.01 per share, with a dividend yield of 3.11%. This compares to the Financial - Investment Management industry's yield of 1.66% and the S&P 500's yield of 1.30%. The company's annualized dividend growth in the past year was 12.92%. Check Grupo Aval Acciones y Valores S.A. dividend history here>>>

Hanmi Financial (HAFC) is paying out a dividend of $0.28 per share at the moment, with a dividend yield of 3.48% compared to the Banks - West industry's yield of 2.4% and the S&P 500's yield. The annualized dividend growth of the company was 8% over the past year. Check Hanmi Financial dividend history here>>>

Currently paying a dividend of $0.68 per share, ONE Gas (OGS) has a dividend yield of 3.42%. This is compared to the Utility - Gas Distribution industry's yield of 3.49% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 1.52%. Check ONE Gas dividend history here>>>

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.

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'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.

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

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