When we leave the workforce, our investment priorities typically change significantly. Retirees aren't nearly as interested in growing their nest egg as they are in preserving their money and generating income.
Unfortunately, fixed-income investments simply aren't generating the type of income that many retirees need, especially in the current environment of record-low bond yields. While stocks can certainly be a bit more volatile than bonds over the short run, there are some excellent dividend stocks with high yields and relatively low risk that could be just what retirees are looking for.
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Monthly dividends and peace of mind
I've called Realty Income (O -0.77%) the best all-around dividend stock in the market, and that can be just as true for retirees as it is for 25-year-old investors just getting started.
Realty Income is a real estate investment trust that specializes in single-tenant retail properties. The REIT is rock-solid because of the specific types of retail tenants occupying the 6,500+ properties in the portfolio. Specifically, Realty Income focuses on tenants that are recession-resistant, not easily disrupted by online competitors, or both. Top property types include drugstores, warehouse clubs, dollar stores, and convenience stores.
If you're a retiree depending on your stocks for income, you'll be thrilled to know that Realty Income has paid 602 consecutive monthly dividends and has increased its payout for the past 92 quarters in a row. There's also a ton of long-tailed growth potential, as evidenced by the 15.3% annualized total return (stock price plus dividends) since its 1994 NYSE listing.
A great choice for income-seeking retirees
AT&T (T -0.44%) is unlikely to produce impressive stock price growth anytime soon. There's certainly some growth potential with its HBO Max streaming service, and the wide-scale rollout of 5G should give the company a nice tailwind, but the company isn't exactly full of growth potential. Plus, after paying its dividend, AT&T needs to focus the majority of its cash on reducing the massive debt load it incurred over the past few years, leaving little to invest in growth.
That said, AT&T can still be a retiree's dream stock. The company pays a 7.5% dividend yield that's well-covered by earnings and has increased its payout for 36 consecutive years (including in 2020). The bulk of AT&T's revenue comes from predictable, utility-like wireless subscribers. That's not too exciting, but steady and recurring income means that the dividends should keep growing.
I wouldn't expect AT&T to double your money in the next few years, but what it can do is provide a massive and predictable income stream for retirees that most other stocks can't match.
When in doubt, spread your money out
As you might imagine, investing in individual stocks – even those as solid as the two I just discussed – isn't the best move for all retirees. Unless you have the time and desire to research, evaluate, and monitor your investments, you're probably better off putting your portfolio on autopilot with index funds.
One index fund that's an excellent addition to a retiree's portfolio is the Vanguard High Dividend Yield ETF (VYM -0.55%). This is an exchange-traded fund, or ETF, that invests in a diverse portfolio of stocks that pay above-average dividend yields. Top holdings are mostly blue chip companies like Johnson & Johnson, Procter & Gamble, and JPMorgan Chase -- but since the portfolio contains more than 400 stocks, you won't rely on any one company's performance too heavily.
Based on its payout over the past 12 months, the Vanguard High Dividend Yield ETF pays a generous 4.4% yield. With a rock-bottom 0.06% expense ratio, your investment fees will be extremely low.
