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5 Dividend Stocks You Can Depend On

Millions of investors rely on their portfolios to help provide them with enough income to make ends meet. Given how low interest rates on bonds and other fixed-income products have gotten lately, more investors are turning to dividend-paying stocks to make up the shortfall in their overall income.

When you're hungry for income, it's tempting to grab up the highest-yielding stocks you can find. But among U.S. companies, you can often do better by sticking with yields that are slightly lower, if you can also identify stocks that will keep delivering the dividend goods year after year after year. Later in this article, I'll share some of those stocks, but first, let's look at why you don't always do best taking the high-yield road.

Deferring gratification
Morgan Stanley
recently did a survey that divided U.S. dividend-paying stocks into five equally sized groups. The stocks with the highest yields went into the first group, the next-highest-yielding stocks went into the second group, and so on down to the lowest-yielding stocks in the fifth group. The company then compared performance among the groups.

What Morgan Stanley found was that unlike in other countries, U.S. stocks that had the highest yields didn't have the best performance. Rather, it was the second highest yielding group that put in top returns.

Anecdotally, one possible explanation may be that often, high-yielding stocks are set up for a fall, typically falling sharply right before a dividend cut that brings the stock's yield back down to earth. By contrast, less aggressive payouts are more sustainable and allow the stocks that pay them to have a better chance at growth and capital appreciation as well as healthy payouts.

Five prospects for your portfolio
To come up with some good ideas for further research, I looked at dividend stocks yielding between 2% and 4% that have delivered 10% dividend growth over the past one, three, five, and 10 years.

The resulting companies were quite varied, both in past performance and in industry focus. Among the top performers over the past five years were Union Pacific (NYSE: UNP  ) and McDonald's (NYSE: MCD  ) , both of which have more than doubled since mid-2007. High energy costs have boosted prospects for railroad companies by making alternate transportation methods more expensive, and the long boom in the industry has allowed Union Pacific to boost its dividend twice in the past five quarters to just barely reach the 2% yield mark. Meanwhile, McDonald's has benefited from strong growth around the world as it works its way into emerging market economies and builds up its overall global presence. Even as a global slowdown threatens to take hold and has pushed McDonald's stock down, the company has also stayed innovative on the menu front to keep its competition at bay.

Yet not all dividend payers have had an easy time lately. Walgreen (NYSE: WAG  ) is a Dividend Aristocrat with a long history of increasing dividends through good times and bad. Yet over the past five years, the stock has lost a quarter of its value even including dividends. More recently, the company arguably made a misstep by breaking off an agreement with pharmacy-benefits manager Express Scripts, essentially forcing would-be Walgreen shoppers to go to competitors instead.

Meanwhile, solidly in the middle of the road from a performance standpoint are Intel (Nasdaq: INTC  ) and Cliffs Natural Resources (NYSE: CLF  ) , up roughly 28% since mid-2007. Both companies have abundant positives and negatives sending investors in different directions. For instance, Intel still rules the PC microprocessor space, but as mobile technology has become more important and now poses a threat to the long-term viability of the PC, Intel now faces a struggle to gain prominence in the mobile space.

Similarly, Cliffs was on top of the world for a long time when its coal and iron ore resources were in demand. The coal-killing factor of low natural-gas prices and falling demand for steel production in China, however, have hit Cliffs hard, and it isn't entirely clear when prices will recover. But that didn't stop Cliffs from instituting a new dividend policy that resulted in a whopping 123% jump in its payout.

Be smart
No stock is a sure thing, so if you're looking at dividend stocks as a substitute for bonds, look again. But if you're willing to take on the greater risk that stocks entail, you can get a nice kicker on your income. These stocks have stood the test of time and should continue to provide healthy payouts for the foreseeable future.

Also, if you'd like access to even more dividend-paying stocks, you should obtain a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks." As the name implies, we're going to give you access to some of the best dividend companies in the world, and best of all, this report is completely free, so don't miss out!

Fool contributor Dan Caplinger likes it when companies show him the money. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of McDonald's and Intel. Motley Fool newsletter services have recommended buying shares of Intel and McDonald's. Try any of our Foolish newsletter services free for 30 days. 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 Fool's disclosure policy is something you can depend on.

Read/Post Comments (7) | Recommend This Article (64)

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 July 04, 2012, at 5:12 PM, prginww wrote:

    This is a poor article as it is not clear which 5 stocks you are referring. Also several of these stocks such as Walgreen has problems.

    I would appreciate it if the articles title is supported by the story.

  • Report this Comment On July 04, 2012, at 5:22 PM, prginww wrote:

    Bsorge10 - did you even read the article. What could be more clear? He names UNP, MCD, WAG, INTC & CLF.

  • Report this Comment On July 04, 2012, at 7:22 PM, prginww wrote:

    I'ld like to see these returns adjusted for inflation. How good are they then?

    I'vw listened to Advisors harp about how bad bonds and treasuries are because you are losing money when they are adjusted for inflation. But nobody uses this analysis for the dividend stocks they tout. Minus inflation, I don't think UNP's 2% is much to talk about and certainly not adequate compensation for the black swan risks all stocks are subject to.

  • Report this Comment On July 04, 2012, at 8:10 PM, prginww wrote:

    I agree with Bsorge10. I kept looking for more of the article telling which 5 stocks fit the criteria. There was more criticism about some of the stocks then praise. Mixed signals for sure. Happy 4th

  • Report this Comment On July 05, 2012, at 8:52 PM, prginww wrote:

    @bsorge10, twosense -

    Apologies for any confusion; since I discussed exactly five stocks, I figured it wouldn't be ambiguous.

    As for problems, I see the challenges these companies currently face as short-term issues. The main point is that their long-term track record has overcome similar challenges in the past. Thus the title.


    dan (TMF Galagan)

  • Report this Comment On July 06, 2012, at 11:57 AM, prginww wrote:

    How about Mo & PM

  • Report this Comment On July 06, 2012, at 11:56 PM, prginww wrote:

    I think coke definately belongs on this list a super solid company with a long history of being a world dominating brand. Also Southern Company is a great choice I have held it in the past when the general market was off.I held value and continued to pay a 5% dividend. I worked for the company in the distant past and they were advanced in their communications for a utility company even then. They operate nuculear power plants but you never hear about them.

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