Get Naked With 7 Dividend Stocks

Has your neighbor seen you naked?

Let's hope not, unless you're excellent friends. But if you don't want to get caught with your pants figuratively down in your retirement (or wind up too cash-strapped to afford curtains), read on.

If you're like me, you're facing a retirement for which an entire generation seems unprepared. Social Security can't be counted on. And even if it comes through, can you get by on it? Probably not. Your retirement depends on you -- on your saving and investing.

Dividend stocks will take you there
A few lucky ducks will find the next Microsoft -- the one-in-a-million, needle-in-a-haystack stock that appreciates 37,000%. Their money problems are over. But what about the rest of us?

Although I've worked at a hedge fund, as The Motley Fool's director of research and analysis, and as the advisor for the Motley Fool Income Investor newsletter, I like to turn to academia for researched, unbiased answers.

In this case, academics have two things to say -- and emphatically so -- that I'd like to share with you:

1. You're crazy to be chasing after the glamour stock du jour. Ever heard of Lakonishok, Shleifer, and Vishny? This famous (by academic standards) trio churned out a breakthrough study in 1994. In "Contrarian Investment, Extrapolation, and Risk," they chopped stocks into two dimensions: price and growth. Their finding is nothing short of amazing: Cheap, slow-growing stocks outperform high-growth glamour stocks by 11 percentage points annually!

2. Dividend stocks thump the market -- and do it with less risk. Moreover, they actually have higher earnings growth, contrary to popular opinion, according to Rob Arnott and Clifford Asness, who found that stocks with the highest dividends had the highest earnings growth over the next decade. And as I mentioned in a recent article, Ned Davis Research found that from 1972 to 2006 (the period following the U.S. abandonment of the gold standard under Nixon), S&P dividend payers outperformed non-payers by six percentage points annually!

The academics' lesson is simple: Don't chase hot, sexy stocks, and if you want to get rich responsibly, dividend stocks are a great place to start.

Dividend stocks run a large gamut, from companies trolling a dividend just to attract investors (avoid these!), to steady-as-a-rock utilities, to tankers yielding 15% annually, to Microsoft, which paid out $3.8 billion in dividends last year. You've got plenty of options.

Consider becoming excellent friends with these seven stocks
To help you zero in on the very best dividend stocks -- something I do daily in managing the dividend-focused Motley Fool Income Investor -- I've assembled a screen for you using Capital IQ, an institutional software package to which I have access.

As I do in my newsletter, I set a $1 billion minimum for market cap. That weeds out small stocks likely to get tossed around by the market's waves. Next, I set a minimum yield of 2.5%. Because I don't want you looking at a stock that can't sustain its dividend, I weeded out stocks whose dividend was higher than 80% of free cash flow (which gives a minimum cushion of 20%, although I generally advise more in my newsletter).

Here are seven stocks from the screen. These aren't newsletter recommendations (unless otherwise noted), but they are starting points for further research.

In the spirit of researching, I'd also like to offer you a guest pass to my newsletter -- because I believe it will become instrumental in finding dividend stocks to fuel your retirement savings. In fact, beyond investment advice, Income Investor has a quiver of more than 70 ready-to-go recommendations.

Your guest pass is free, and I'm sure you'll find a stock (or several!) within Income Investor that's perfect for you. Click here to claim it.

This article was first published Oct. 9, 2007. It has been updated.

James Early owns a fab and glamorous wardrobe, but no stocks mentioned in this article. Microsoft is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.