What will you use to generate income in retirement?

Many investors think low-risk, fixed-income products like Treasury bonds and CDs will do the trick. But as retirees have learned in the past few years, these products may not be enough. Since 2001, for instance, the yield on the 10-year Treasury hovered between 3% and 5% -- generating a paltry $300 to $500 per year for each $10,000 invested.

That's simply not enough to live on today, let alone 10 or 20 years down the road.

So what's an investor to do?

Get started now
At first glance, large dividend-paying stocks with single-digit growth don't seem all that attractive, particularly when stocks like Research In Motion (NASDAQ:RIMM), GameStop (NYSE:GME), and Mosaic (NYSE:MOS) are burning up the charts so far this year. But large dividend-paying stocks just might end up being your best friends when retirement rolls around.

The catch is that to maximize the utility of dividend-paying stocks, you should purchase them well before you actually need the income. The longer you hold onto a dividend payer, the bigger your dividends tend to get.

For example, an investor who picked up $10,000 worth of Altria in January 1970 (then Philip Morris) would have initially acquired 277 shares, a stake that would have begun by paying out a mere $69 per quarter at the time.

That wasn't much then, but after 37 years of stock splits, our hypothetical investor now has 26,667 shares of Altria and 18,454 shares of the recent spinoff of Kraft -- altogether worth approximately $2.5 million today. Perhaps, more importantly, our investor would be receiving nearly $100,000 each year in dividends. (It should also be noted that these figures would be even larger if the investor reinvested dividends over the years.)

It's hard to believe, but this one stock alone could have funded your retirement.

Staring you in the face
While Altria is an incredible example, investors in other stalwarts have seen similar (albeit somewhat lesser) successes over the same time period:

Company

No. of shares,
January 1970*

No. of shares,
October 2007

Current value
of shares

Annual
dividends

Hershey (NYSE:HSY)

397

9,523

$424,535

$11,333

Colgate-Palmolive (NYSE:CL)

230

5,524

$376,816

$7,954

H.J. Heinz (NYSE:HNZ)

336

9,081

$418,452

$13,803

*$10,000 invested on Jan. 2, 1970.

Remarkably, the companies listed in the table had already reached blue-chip status in 1970. You didn't have to dig around to find them or take a flier on a hot new technology. These companies were simply doing what they had done for decades -- growing steadily and rewarding shareholders.

Foolish bottom line
So what are the best stocks to generate income for your retirement? The simple answer: stocks that pay you back.

But all dividends aren't created equal. That's why Motley Fool Income Investor advisors James Early and Andy Cross look for businesses with strong track records that are set up nicely for future growth.

If you want to see the stocks Income Investor is recommending today, follow this link for a free 30-day trial of the service. Time is the only thing stopping you from reaping the rewards of dividend stocks for years to come, so get started now!

This article was originally published on Dec. 22, 2006. It has been updated.

Fool contributor Todd Wenning does not own shares of any company mentioned in this article. H.J. Heinz and Kraft are Motley Fool Income Investor picks. Colgate is an Inside Value recommendation. GameStop is a Stock Advisor choice. The Fool's disclosure policy pays dividends every day.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.