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

Also, retirees who have constructed a nest egg have valid justifications to be concerned, since the traditional ways to plan for retirement may mean income can no longer cover expenses. Some retirees are now tapping their principal to make a decent living, pressed for time between decreasing investment balances and longer life expectancies.

In today's economic environment, traditional income investments are not working.

Years ago, investors at or close to retirement could put money into fixed-income assets and depend on appealing yields to generate consistent, solid pay streams to fund a comfortable retirement. 10-year Treasury bond rates in the late 1990s floated around 6.50%, but unfortunately, those days of being able to exclusively rely on Treasury yields to fund retirement income are over.

While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of 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.

So what's a retiree to do? You could cut your expenses to the bone, and take the risk that your Social Security checks don't shrink. Or you could find an alternative investment that provides a steady, higher-rate income stream to replace dwindling bond yields.

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.

One approach to recognizing appropriate stocks is to look for companies with an average dividend yield of 3% and positive average annual dividend growth. Numerous stocks hike dividends over time, counterbalancing inflation risks.

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

Canadian Natural Resources (CNQ Quick QuoteCNQ - Free Report) is currently shelling out a dividend of $0.63 per share, with a dividend yield of 4.77%. This compares to the Oil and Gas - Exploration and Production - Canadian industry's yield of 0% and the S&P 500's yield of 1.7%. The company's annualized dividend growth in the past year was 53.34%. Check Canadian Natural Resources (CNQ Quick QuoteCNQ - Free Report) dividend history here>>>

CTO Realty (CTO Quick QuoteCTO - Free Report) is paying out a dividend of $0.38 per share at the moment, with a dividend yield of 8.31% compared to the REIT and Equity Trust - Other industry's yield of 4.62% and the S&P 500's yield. The annualized dividend growth of the company was 14% over the past year. Check CTO Realty (CTO Quick QuoteCTO - Free Report) dividend history here>>>

Currently paying a dividend of $0.16 per share, Huntington Bancshares (HBAN Quick QuoteHBAN - Free Report) has a dividend yield of 4.53%. This is compared to the Banks - Midwest industry's yield of 2.54% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 3.33%. Check Huntington Bancshares (HBAN Quick QuoteHBAN - Free Report) 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.

Combating the impact of inflation is one advantage of owning these dividend-paying stocks. Here's why: many of these stable, high-quality companies increase their dividends over time, which translates to rising dividend income that offsets the effects of inflation.

Thinking about dividend-focused mutual funds or ETFs? Watch out for fees.

You may be thinking, "I like this dividend strategy, but instead of investing in individual stocks, I'm going to find a dividend-focused mutual fund or ETF." This approach can make sense, but be aware that some mutual funds and specialized ETFs carry high fees, which may reduce your dividend gains or income, and defeat the goal of this dividend investment approach. If you do wish to invest in a fund, do your research to find the best-quality dividend funds with the lowest fees.

Bottom Line

Seeking steady, consistent income through dividends can be a smart option for financial security in retirement, whether you invest in mutual funds, ETFs, or in dividend-paying stocks.