NEW YORK (TheStreet) -- For many investors, the main appeal of an annuity, a contract with an insurance company, is that it provides a fixed stream of income for a set period of time.
Far more attractive, however, are dividend aristocrat stocks such as HCP (HCP), AT&T (T), and Consolidated Edison (ED) that have increased the dividend payment to shareholders annually for at least the past 25 years.
An annuity is similar to a bond in this regard in that anything either can do, a dividend aristocrat stock can do much, much better for an investor.
Annuities are typically used in retirement planning.
Depending on the rating of the insurance company selling the annuity, it can provide a reliable stream of income for the length of the contract. The rates offered depend on variety of factors, ranging from the quality of the issuer to the prevailing economic conditions. As an example, the present rate for the Athene Benefit Ten Fixed Index Annuity is 1.70%.
By contrast, the dividend yield for HCP, a real estate investment trust for healthcare facilities, is 5.87%. For AT&T, the communications giant, it is 5.22%. Consolidated Edison, a utility serving New York, pays its shareholders a dividend at a rate of 4.48%.
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Here is where dividend aristocrat stocks are far superior to annuities, and to bonds.
Each of those stocks has a history of increasing the dividend. That rarely happens with an annuity. It has happened annually for at least the past quarter-century with HCP, AT&T, Consolidated Edison and every other member of the dividend aristocrat group.
Over the past five years, the dividend growth rate for HCP has been 2.87%. For AT&T, the dividend growth rate has been 2.25% for the same period. Consolidated Edison generated an 18.80% dividend growth rate for its shareholder over the last half decade. Shareholders have every reason to expect this increasing of the amount of the dividend paid to continue into the future.
Not only is the income feature far superior, but so is the security component for dividend aristocrat stocks.
Annuities are not guaranteed by the federal government. There have been more than 60 annuity defaults since 1991. By contrast, to be a dividend aristocrat, a stock has to have increased its dividend annually for at least 25 years. Just paying a dividend is a very significant sign of financial strength for a publicly traded company. To have upped it yearly for more than two decades is very reassuring to investors. It demonstrates that the firm is doing well enough to increase the amount of cash that can be distributed to the owners of the company, as it is not required for business operations.
As for the principal role of an annuity in providing retirement income, there is no comparison with what a dividend aristocrat has to offer that is so much more rewarding over the long term.
The buyer of an annuity has to hope that the insurance company stays in business long enough to make the investment worth the money. That has not happened more than sixty times since 1991. In just owning the stock, in comparison, a dividend aristocrat shareholder is given a raise every year in the dividend income received from the company. The longer the retirement lasts for the shareholder, the more the income grows, based on the history of dividend aristocrat stocks. Increasing also over time is the superiority of a dividend aristocrat stock as a long term investment as opposed to an annuity.
At the time of publication the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.