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The importance of investing in dividend stocks has been outlined and documented for decades. Those who have been fortunate enough to heed dividend-oriented advice have been able to grow and preserve their wealth for years on end.

Today, with Treasuries and interest rates at all-time lows, it's as important as ever to consider dividends essential to any portfolio. That's why I've taken the time to provide you with the 42 most promising and stable dividend stocks, and used my own criteria to offer you the world's best dividend play.

My, oh my, how things can change!
In the late 1990s and early 2000s, technology and growth stocks were understandably all the rage -- that is, until the dot-com bubble burst and brought down with it many crazy-high stock prices. In the middle of the decade, housing and financial companies hit peak levels, as lax lending and the subprime boom led to record property prices. Then, of course, that bubble burst, too.

Today, dividend investing is the shiny toy that everyone seems to be so interested in. Is it just a fad? That, I cannot answer. However, I can say that before you jump in headfirst, there are a few things you need to be wary of.

High-yielding stocks can be extremely attractive not only because Treasuries are so low, but because reinvesting dividends can be a great way to achieve wealth over the long term. Yet sometimes, as my dad used to tell me, "If it seems too good to be true, then it probably is."

Who are these high yielders?
Let's check out a few examples.

Companies like Annaly Capital (NYSE: NLY  ) , Chimera (NYSE: CIM  ) , and Hatteras Financial (NYSE: HTS  ) all pay outstanding dividends above 14%. Because these companies are real estate investment trusts (REITs), they are required to distribute at least 90% of their taxable income to investors, hence their very high dividend yields. Its these huge payouts that attract investors. Who wouldn't want to lock in a great 14% dividend over the next few years while Ben Bernanke and friends keep rates at insanely low levels?

First, we must consider if these dividends are sustainable. Any change in the Fed's interest rate policy could drastically eat away at these companies' business model, as they depend on cheap borrowing to generate earnings. In addition, there's always the chance (slim, though it may be) that legislation will be passed to remove federal guarantees for Fannie Mae- and Freddie Mac-type securities. I'm not saying the above companies are not good investments. In fact, my Foolish colleague Ilan Moscovitz recently suggested readers buy Annaly Capital. I'm just reiterating all the facets one must consider before following the herd into what could be high, yet unstable dividends.

Other companies paying really high dividends include Frontier Communications (NYSE: FTR  ) and Windstream (Nasdaq: WIN  ) , both above 7.5%. That looks great on the surface, but are these dividends going to be left for dead? They each have extremely high payout ratios (which could point to an unstable payout) and neither of them exactly has a bright future in terms of growth. As domestic, rural telecom providers, expansion and investor excitement isn't exactly boiling over. In fact, both companies are expected to see zero or negative growth over the next five years. Again, just something to reflect upon before you buy one of these companies.

The world's absolute best
Many of you have probably heard of the S&P 500's Dividend Aristocrats, but for those of you who have not, let me introduce you.

The Aristocrats is an elite group of blue-chip, large-cap stocks that have been able to increase their dividend, every year, for at least 25 years. This is obviously no easy feat as these companies have to combat recessions and cope with booms and busts, but still they've managed to increase shareholder wealth. These companies really are the cream of the crop; over the past five years the Aristocrats have averaged a 3.32% annual return while the general index has earned only a measly 0.42%.

In 2010, 42 companies made the list, so I screened for the company with the highest payout and found CenturyLink (NYSE: CTL  ) , a U.S. telecom provider with a 6.7% yield. Although it's an Aristocrat with a great yield, the company is only supposed to grow by 0.44% in the next five years -- not exactly what I would call a stock that will see great growth in its stock price.

So instead, I screened the Aristocrats list for stocks that had the largest yields, the highest five-year growth rates, and the lowest payout ratios. The stock I chose from this even more select group, while it may shock you, is what I now consider the world's best dividend stock.

And the winner is ....


Dividend Yield

Consecutive Dividend Increases

Payout Ratio

5-Year Expected Growth Rate

McDonald's (NYSE: MCD  ) 3.1% 34 Years 49.0% 10.18%

Source: Capital IQ, a division of Standard & Poor's

I know, I know -- this is probably not the exciting, fresh, new idea you were anticipating. But let me explain!

A $50,000 investment with a 3.1% dividend yield would generate more than $40,000 in extra value over 20 years if you reinvested your dividends, even if neither the stock price nor the dividend payout changed over that time. Considering that McDonald's has every incentive to increase its yield over time, you can certainly expect to reap much more than that in pure dividend-loving profits.

And even more important, McDonald's is a blue-chip stalwart that you can count on, in both bull and bear markets. The company has one of the most prestigious brand names in the world, estimated to be worth about $33.5 billion, according to Interbrand. In times where U.S. consumers may be eating out less, McDonald's can count on its international exposure to carry the weight; 40% of its revenues are derived in Europe while another 20% come from Asia and the Middle East. This not only helps diversify revenue streams, but also gives you some added currency exposure as the dollar continues to decline.

Still don't think McDonald's can see a surge in its stock price? Consider this: In the past 10 years, while a typical S&P 500 ETF gained just 0.7% annually, McDonald's saw a dramatic 12.9% annual compounded rate of return. Not too shabby for an old blue chip, huh?

Now, I'm not saying you should avoid all stocks with eye-popping dividend yields, but most of the time, they just aren't as stable as you would want your portfolio to be.

If you're interested in more opportunities like the one above -- high yielders with room to grow and a history of success -- click here to get The Motley Fool's five-page free report, 13 High-Yielding Stocks to Buy Today.

Jordan DiPietro owns no shares of companies named above. The Fool owns shares of Annaly Capital Management. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that wants to be home for the Holiday's.

Read/Post Comments (14) | Recommend This Article (95)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 06, 2010, at 5:28 PM, Howard1ii wrote:

    What about AGNC? it has the same business model as Annaly except it pays 19%.

  • Report this Comment On December 06, 2010, at 8:42 PM, worthless111 wrote:

    I have researched both. The only difference is 4 %. Both are almost too good to be true...If anyone out there knows anything better than AGNC to get a secure dividend let us know! Thanks

  • Report this Comment On December 06, 2010, at 9:25 PM, mrspeabody wrote:

    I'm confused. Wouldn't a dividend stock at 3.1%

    " if neither the stock price nor the dividend payout changed"

    produce the same results as a savings account at 3.1% compound interest? If that is the case, a $50,000 investment would be worth about $68,500 after 10 years. At least according to savings calculator. Am I missing something?

  • Report this Comment On December 06, 2010, at 9:57 PM, MFRichard wrote:

    "A $50,000 investment with a 3.1% dividend yield would generate more than $40,000 in extra value over 10 years if you reinvested your dividends, even if neither the stock price nor the dividend payout changed over that time."

    Explain how, it leaves the $50,000 at $67,851.06 not seeing the extra $27,851.06, where did it come from? magic? all of this is excluding the 2-3% inflation Bernanke wants...

  • Report this Comment On December 06, 2010, at 11:30 PM, TMFPhillyDot wrote:

    It should say over a 20-year time horizon. I apologize for the misprint. It should be corrected by Tuesday morning.

    Thanks for the catch!


    Jordan (TMFPhillyDot)

  • Report this Comment On December 06, 2010, at 11:34 PM, TheWize1 wrote:

    Agree with howard1ii about AGNC and the chart does look reasonably good

  • Report this Comment On December 06, 2010, at 11:48 PM, bs1934 wrote:

    What's wrong with KMP? They have been paying 7% plus dividends for some time and I don't believe their pipelines are going to go away.

  • Report this Comment On December 07, 2010, at 5:17 AM, exdividendday wrote:

    MCD is a perfect stock! But there is a little downside potential. MCD reports steady same store sales growth over years. What happens if this trend invents? The price for growth and stability an investor pay for save harbor stocks like PG, KO, PEP or MCD is high. But what we know today is that these stocks will never grow with double digit rates in the long run. I am looking for financial stability. One criterion is the debt to assets ratio or net cash / net debt of the company. The more of cash a company serves the more growth possibilities it has due to M&A or organic growth. Here is a sheet of 23 high dividend yielding stocks with largest cash accounts in relation to its market capitalization:

    The average dividend-yield amounts to 5.99 percent while the average P/E ratio is 12.24. And the winner is CLGX!

  • Report this Comment On December 09, 2010, at 4:42 PM, mikecart1 wrote:

    The math used to show how great MCD is another example of how math and education in the US has fallen greatly. Oh my!

  • Report this Comment On December 10, 2010, at 4:57 PM, yaiwolf wrote:

    Very amusing, "the world's best", give me a break.

    There are many great "world class" dividend stocks out. Trying to pick just one is like finding a needle in the haystack.

  • Report this Comment On December 11, 2010, at 3:35 PM, Rouleur wrote:


    there is nothing wrong with KMP-good call. The only risk is if the US basically stops using natural gas as they are like atoll collector for NG. I like that pick.


  • Report this Comment On December 11, 2010, at 3:52 PM, Rouleur wrote:

    add COP to the list.

  • Report this Comment On December 12, 2010, at 11:13 AM, irwann wrote:

    Bought MCD January 2007. Up more than 90% with dividends reinvested.

  • Report this Comment On December 13, 2010, at 8:37 PM, surfgeezer wrote:

    @ mrspeabody and mfrichard-let me try to explain. You have 2key metrics's that interest does not have.

    1- assuming you reinvest the dividends with more shares, you get the dividends on each share buying more shares, compounding much like interest, but MCD has consistently GROWN the dividend it pays, thus ALL your shares grow. So the shares you bought @ 3.1 will in fact be a higher return and you get extra compounding. MCD just raised it's dividend from .55 to .61 last quarter and they consistently do that.

    2 The individual price of your shares go up, to go with the additional shares. So a 5% price appreciation is in fact higher due to the more shares.

    MCD is a good solid stock but this article is woeful. It really should have explained the structural differences in dividend stocks. MLP's and REIT's are mandated by law, because they are not taxed, to "flow thru" profits. Royalty trusts are also a different animal, with by definition high dividends and no real "earnings".

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