Here's an eye-opening statistic: older Americans are more afraid of running out of money than of death itself.

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.

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.

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 we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant low risk, low yielding Treasury and fixed-income alternatives.

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

One way to identify suitable candidates is to look for stocks with an average dividend yield of 3%, and positive average annual dividend growth. Many stocks increase dividends over time, helping to offset the effects of inflation.

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

BNP Paribas SA (BNPQY Quick QuoteBNPQY - Free Report) is currently shelling out a dividend of $1.8 per share, with a dividend yield of 5.84%. This compares to the Banks - Foreign industry's yield of 4.63% and the S&P 500's yield of 1.75%. The company's annualized dividend growth in the past year was 10.36%. Check BNP Paribas SA (BNPQY Quick QuoteBNPQY - Free Report) dividend history here>>>

Cisco Systems (CSCO Quick QuoteCSCO - Free Report) is paying out a dividend of $0.39 per share at the moment, with a dividend yield of 3.24% compared to the Computer - Networking industry's yield of 0% and the S&P 500's yield. The annualized dividend growth of the company was 2.7% over the past year. Check Cisco Systems (CSCO Quick QuoteCSCO - Free Report) dividend history here>>>

Currently paying a dividend of $1.25 per share, Prudential (PRU Quick QuotePRU - Free Report) has a dividend yield of 6.07%. This is compared to the Insurance - Multi line industry's yield of 2.12% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 4.17%. Check Prudential (PRU Quick QuotePRU - Free Report) dividend history here>>>

But aren't stocks generally more risky than bonds?

Yes, that's true. As a broad category, bonds carry less risk than stocks. However, the stocks we are talking about - dividend -paying stocks from high-quality companies - can generate income over time and also mitigate the overall volatility of your portfolio compared to the stock market as a whole.

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.

If you're interested in investing in dividends, but are thinking about mutual funds or ETFs rather than stocks, beware of fees. Mutual funds and specialized ETFs may carry high fees, which could lower the overall gains you earn from dividends, undercutting your dividend income strategy. Be sure to look for funds with low fees if you decide on this approach.

Bottom Line

Pursuing a dividend investing strategy can help protect your retirement portfolio. Whether you choose to invest in stocks or through low-fee mutual funds or ETFs, this approach can potentially help you achieve a more secure and enjoyable retirement.