Annuities, stocks or Treasurys? Pros weigh in on the best source of retirement income right now

Published Wed, Aug 9 20237:14 PM EDT

Treasury yields and stocks have more upside ahead, according to some Wall Street investors, and annuities are yielding more than ever. So if you're nearing — or already in — retirement, which offers the best source of income? CNBC Pro speaks to the experts to find out. Stocks vs. annuities David Dietze, senior investment strategist at Peapack Private Wealth Management, recommended annuities and stocks — with some caveats. "When you're planning for your retirement are you better off with an index fund or a good paying annuity? Annuities are paying far more than they used to, with rates up," he said. But to see how attractive an annuity rate is, compare it with the rate of inflation, he said. "So, an annuity with an effective yield of 2% in a zero inflation environment may be more attractive than a 5% effective yield on an annuity in an 8% annual inflation environment," said Dietze. The downside to annuities, however, is that they are illiquid. "While annual payouts are received, an unexpected need for principal may be difficult/expensive to obtain," he said. The returns from annuities are also typically inferior to the returns that stock-heavy portfolios can produce, Dietze added. Stocks, on the other hand, are easily liquidated if the need for cash arises, he said. "In today's world of plentiful liquidity in the market and typically zero trading commissions, selling a few shares can easily and cheaply produce the cash flow you need," Dietze said. "Bottom line, we advise investors needing income to develop a diversified portfolio based on their return objectives, volatility tolerance, tax constraints and other issues. Then, periodically simply sell portions of the portfolio to create the distribution stream desired," he concluded. John Rekenthaler, director of research at Morningstar, said it ultimately depends on the needs of the individual investor. "Annuities suit investors who are worried about outliving their income, funds/ETFs are for investors who wish to retain control of their assets, and individual stocks and bonds are for sophisticated investors who wish to have a customized portfolio, rather than buy pooled investments like annuities or funds," he said. Right now, however, Rekenthaler said he would go for annuities, bonds or funds because real interest rates are high. For example, the real interest rate on 30-year Treasury Inflation-Protected Securities is now 1.8% — up from a negative rate two years ago, he said. Dividend-paying stocks Sameer Samana, senior global market strategist at Wells Fargo Investment Institute, said larger-cap stocks listed in the U.S. and elsewhere can offer decent dividend yields and dividend growth. Here's a CNBC Pro screen of cheap stocks with safe and high dividends. But Rekenthaler of Morningstar isn't a fan of dividend-paying stocks at the moment. "While dividend-paying stocks are always a possibility for income, they have become less attractive relatively to the other options because bond yields have risen so aggressively over the past 18 months, while stock dividends have barely increased," he said. If he had to pick such stocks, however, he would go for oil companies that "look relatively attractive." "Their dividends have increased this year because their stock prices have declined," Rekenthaler said, naming stocks such as ExxonMobil and Shell , which now have dividends of 3.5%. "That is not the highest possible level of income, but as they continually increase their dividends, that income stream will grow over time," he said. "Those stocks are good bets for investors who are worried about the effects of inflation, and who also hope to grow their capital base over time, through the appreciation of their shares." Treasurys Samana of Wells Fargo Investment Institute said she likes Treasurys best — given the firm's expectations of a recession. "More specifically we find the most value on the short- and long-term parts of the curve and would be implementing a barbell approach (investors can use a variety of short/long-term ETF, or ladder out using individual bonds)," she said. Rekenthaler of Morningstar suggested buying 10-year Treasurys. "Given the Federal Reserve's apparent success at reducing inflation, and its resolve at pushing inflation back down, that now is a good time to own relatively long bonds – say, 10 years," he added.