Yes, you can return a blocking creature to your hand before it takes damage. What happens is:
- You block with Dryad Arbor
- You and your opponent both get a chance to cast instants and activate abilities
- Damage is dealt
- Note that if the blocked creature has tramble, it will still assign all of its damage directly to the player
Rules 509.1 through 509.7 cover what happens during the declare blockers step, which occurs before damage is dealt. The two rules that are relevant to your question:
509.1. First, the defending player declares blockers.
509.5. Fifth, the active player gets priority. Players may cast spells and activate abilities
Here is a diagram that illustrates the turn structure. It shows all the opportunities that you get to cast or activate things.