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3 Top Dividend Stocks to Maximize Your Retirement Income

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

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.

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

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.

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

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.

DCP Midstream Partners, LP (DCP) is currently shelling out a dividend of $0.43 per share, with a dividend yield of 4.09%. This compares to the Oil and Gas - Production and Pipelines industry's yield of 4.68% and the S&P 500's yield of 1.59%. The company's annualized dividend growth in the past year was 10.26%. Check DCP Midstream Partners, LP (DCP) dividend history here>>>

First Commonwealth Financial (FCF) is paying out a dividend of $0.12 per share at the moment, with a dividend yield of 3.26% compared to the Banks - Northeast industry's yield of 2.47% and the S&P 500's yield. The annualized dividend growth of the company was 4.35% over the past year. Check First Commonwealth Financial (FCF) dividend history here>>>

Currently paying a dividend of $0.21 per share, KeyCorp (KEY) has a dividend yield of 4.27%. This is compared to the Banks - Major Regional industry's yield of 3.09% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.13%. Check KeyCorp (KEY) dividend history here>>>

But aren't stocks generally more risky than bonds?

The fact is that stocks, as an asset class, carry more risk than bonds. To counterbalance this, invest in superior quality dividend stocks that not only can grow over time but more significantly, can also decrease your overall portfolio volatility with respect to the broader stock market.

An upside to adding dividend stocks to your retirement portfolio: they can help lessen the effects of inflation, since many dividend-paying companies (especially blue chip stocks) generally increase their dividends over time.

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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

DCP Midstream Partners, LP (DCP) : Free Stock Analysis Report

KeyCorp (KEY) : Free Stock Analysis Report

First Commonwealth Financial Corporation (FCF) : Free Stock Analysis Report

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Zacks Investment Research