Will These Investments Beat Immediate Annuities?

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Annuities have a mixed reputation, but one variety -- immediate annuities -- have been steadily growing. Does their increasingly popularity make them right for you, or are there better ways to build a secure income stream?

Annuity analysis
Most of us avoid variable annuities for good reason: The income they kick out to you fluctuates, since it's tied to something like a stock index.

With an immediate annuity, on the other hand, you plunk down a big chunk of cash now, and you receive a set sum for a set period -- possibly the rest of your life. Immediate annuities aren't cheap, but they're a retirement income solution worth considering. They sort of let you buy your own pension.

Sales have been booming...
You wouldn't be alone in considering immediate annuities. Despite a few ups and downs over the past year or two, their sales are generally growing, up 30% year over year in 2008. New York Life, the leading seller of immediate fixed annuities, saw an 80% jump in sales during the first quarter of 2009, according to the publication Registered Rep.

But should you buy?
Before you jump on the bandwagon, be aware of the downsides. For one thing, once you buy an immediate annuity, you're only entitled to the income stream you agreed to. In particular, if you agreed to a payout for the rest of your life, and you die next year, the insurance company ends up way ahead on the deal.

Of course, that can work the other way, too -- if you live a long time, you'll end up ahead. With an immediate annuity, a 55-year-old investor in California paying $200,000 can expect to receive around $1,062 monthly, which comes to about $12,750 per year.

If you're leery about pursuing an immediate annuity, you might want to build your own retirement income in a different way: via dividend-paying stocks. Suppose that hypothetical investor divided that $200,000 nest egg equally among eight dividend-paying companies (that's $25,000 each):

Company	CAPS stars (out of five)	Recent yield	Approximate annual payout
Altria (NYSE: MO)	****	7.3%	$1,825
National Grid	*****	6.8%	$1,700
Eli Lilly (NYSE: LLY)	****	5.7%	$1,425
Southern Company (NYSE: SO)	****	5.6%	$1,400
Diageo (NYSE: DEO)	*****	4.4%	$1,100
Kraft Foods (NYSE: KFT)	****	4.3%	$1,075
AT&T (NYSE: T)	****	6.3%	$1,575
First Energy (NYSE: FE)	****	5.2%	$1,300
Total		5.7%	$11,400

Data: CAPS.Fool.com.

That payout of $11,400 isn't so far from the $12,750 -- and it will likely grow over time, as dividends get increased. Dividends are never guaranteed, but some are surprisingly reliable.

Annuities can make sense under some circumstances. But before you make a lifetime commitment, be sure to compare your options -- you may prefer to pursue dividend stocks instead.