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

And retirees have good reason to be worried about making their assets last. People are living longer, so that money has to cover a longer period. Making matters worse, income generated using tried-and-true retirement planning approaches may not cover expenses these days. That means seniors must dip into principal to meet living expenses.

The tried-and-true retirement investing approach of yesterday doesn't work today.

For example, 10-year Treasury bonds in the late 1990s offered a yield of around 6.50%, which translated to an income source you could count on. However, today's yield is much lower and probably not a viable return option to fund typical retirements.

The impact of this rate decline is sizable: over 20 years, the difference in yield for a $1 million investment in 10-year Treasuries 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.

How can you avoid dipping into your principal when the investments you counted on in retirement aren't producing income? You can only cut your expenses so far, and the only other option is to find a different investment vehicle to generate income.

Invest in Dividend Stocks

As a replacement for low yielding Treasury bonds (and other bond options), we believe dividend-paying stocks from high quality companies offer low risk and stable, predictable income investors in retirement seek.

Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.

A rule of thumb for finding solid income-producing stocks is to seek those that average 3% dividend yield, and positive yearly dividend growth. These stocks can help combat inflation by boosting dividends over time.

Here are three dividend-paying stocks retirees should consider for their nest egg portfolio.

Arrow Financial (AROW)

is currently shelling out a dividend of $0.28 per share, with a dividend yield of 4.17%. This compares to the Banks - Northeast industry's yield of 2.4% and the S&P 500's yield of 1.49%. The company's annualized dividend growth in the past year was 3.7%. Check Arrow Financial dividend history here>>>

Cal-Maine Foods (CALM)

is paying out a dividend of $1.49 per share at the moment, with a dividend yield of 5.5% compared to the Agriculture - Products industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 16883.33% over the past year. Check Cal-Maine Foods dividend history here>>>

Currently paying a dividend of $1.09 per share,

DTE Energy (DTE)

has a dividend yield of 3.55%. This is compared to the Utility - Electric Power industry's yield of 3.21% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 6.86%. Check DTE Energy 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're thinking, "I want to invest in a dividend-focused ETF or mutual fund," make sure to do your homework. It's important to know that some mutual funds and specialized ETFs charge high fees, which may diminish your dividend gains or income and thwart the overall objective of this investment strategy. If you do want to invest in fund, research well to identify the best-quality dividend funds with the least charges.

Bottom Line

Whether you select high-quality, low-fee funds or stocks, seeking the steady income of dividend-paying equities can potentially offer you a path to a better and more stress-free retirement.

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Arrow Financial Corporation (AROW) : Free Stock Analysis Report

DTE Energy Company (DTE) : Free Stock Analysis Report

Cal-Maine Foods, Inc. (CALM) : Free Stock Analysis Report

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