Here's a revealing data point: older Americans are scared more of outliving wealth than of death itself.

And unfortunately, even retirees who have built a nest egg have good reason to be concerned-with the traditional approaches to retirement planning, income may no longer cover expenses. That means retirees are dipping into principal to make ends meet, setting up a race against time between dwindling investment balances and longer lifespans.

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.

Today's retirees are getting hit hard by reduced bond yields-and the Social Security picture isn't too rosy either. Right now and for the near future, Social Security benefits are still being paid, but it has been estimated that the Social Security funds will be depleted as soon as 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.

Associated Banc-Corp (ASB Quick QuoteASB - Free Report) is currently shelling out a dividend of $0.24 per share, with a dividend yield of 3.64%. This compares to the Banks - Midwest industry's yield of 2.68% and the S&P 500's yield of 1.53%. The company's annualized dividend growth in the past year was 4.55%. Check Associated Banc-Corp dividend history here>>>

Bar Harbor Bankshares (BHB) is paying out a dividend of $0.32 per share at the moment, with a dividend yield of 4.32% compared to the Banks - Northeast industry's yield of 2.26% and the S&P 500's yield. The annualized dividend growth of the company was 6.67% over the past year. Check Bar Harbor Bankshares dividend history here>>>

Currently paying a dividend of $0.31 per share, Brixmor Property (BRX) has a dividend yield of 4.34%. This is compared to the REIT and Equity Trust - Retail industry's yield of 4.03% and the S&P 500's current yield. Annualized dividend growth for the company in the past year was 5.5%. Check Brixmor Property 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 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

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.