7 Stocks for the Good Life

The lowest-risk, most secure way to a great retirement is to invest in dividend-paying blue-chip stocks. That's what I'll attempt to convince you of in the next three minutes, because I think the case is absolutely overwhelming, and it's where I'm putting my family's money.

One caveat before we get started: Blue chips are not the way to grab slam-dunk, overnight returns -- you won't be eating caviar and vacationing in Majorca by next week. But because they produce steadily rising payouts and are the most solid companies around, dividend-paying blue chips are the surest way to guarantee that you'll have income when you need it most.

A case for blue-chip dividends
My case for dividend-paying blue chips is based on their rock-solid stability. You know stalwarts like Wal-Mart (NYSE: WMT) are going to be alive and kicking in 20, 30, 40 years and more. Wal-Mart provides products that consumers will always need, has a redoubtable franchise, and continues to innovate aggressively. Better still, consumers have to do business with it in good times and bad, so it has minimal exposure to industrial cycles.

These types of companies have the security of broad-based revenue streams, high levels of investor confidence, and the access to financial markets that comes with such confidence. And all of that maturity and stability enables them to pay investors billions of dollars in dividends.

Not all dividends are equal, however, as the past few years have shown us. More than one formerly solid company had to cut dividends when the market tumbled -- think General Electric and Dow Chemical. Both are industrials that got stung by poor decisions in the midst of a downturn.

GE Capital suffered heavily during the financial crisis and the dividend cut shored up the company's balance sheet, while Dow suffered from a decline in demand and its refusal to complete a takeover of a rival. But even these stalwarts maintained a portion of their dividend, and could increase their payouts as their situations improve.

You want to invest in blue chips that have proven they are committed to maintaining and increasing their payouts over time, and a company that survived this recession without slashing dividends is a pretty solid bet.

Such businesses will reward your trust over the long term, as they've rewarded countless investors before.

Grow toward the good life
And it's this component -- increasing dividends over time -- that will secure you an income for life so that you never have to rely on a stock's appreciating in order to afford a vacation or the life you want. With blue-chip dividend payers, you can create an income stream that's much better than those from typical annuities.

To give you an example, look at six high-quality companies that have treated investors to increasing payouts:

Already those yields beat almost any interest rate you could get from bank deposits. But the beauty of committed dividend payers is that their payouts go up over time without you having to reinvest those dividends. That last point is critical if you intend to live on your dividend income.

Each of these companies has a solid, recession-resistant franchise and a history of increasing payouts. You might look at the huge negative sitting in Altria's growth column. That's a result of spinning off two huge businesses in the last few years, including another dividend star, Kraft. In fact, Altria has committed to paying out 80% of its income in the form of dividends, and the company owns one of the best consumer brands in Marlboro. Kraft, too, has some excellent consumer brands, and it recently swallowed Cadbury, which provides some international growth.

Coca-Cola has enjoyed the strength of its capital-light drink brands for decades, while Republic Services has the stability afforded by a garbage collector, since we'll always need its product. As one of the few premier shipping companies in the U.S., United Parcel enjoys significant barriers to entry into its high-fixed-cost business, meaning it's unlikely to face as much competition as it might otherwise.

The competitive advantages of Wal-Mart almost need no introduction, but the company has committed to being a low-cost leader. And Sysco is without peer in the food distribution business, and its consistently increasing payouts are testament to its position.

And to drive it home further, the world's greatest investor, Warren Buffett, owns several of the companies listed above.

Simple works
The simplicity of this dividend strategy is amazing. Consumer-focused brands are a great place to begin, but be cautious of businesses that are already facing significant headwinds, no matter how juicy their payouts.

Take Altria, for example, which sports a heady 6.1% yield and has historically been one of the most generous distributors of cash. Given the current government pressure against cigarette smoking, it's hard to imagine Altria in the same form in 20 or 30 years -- and that may affect its long-term ability to increase dividends at a nice clip.

Hitch your wagon to these stars
Like Buffett, the experts at Million Dollar Portfolio are focused on "excellent businesses that mint money, including Coca-Cola and Sysco -- both of which the service holds in its real-money portfolio. Million Dollar Portfolio buys the best of the best stocks from among Motley Fool newsletter recommendations, and advisor Ron Gross and his team manage a portfolio of more than $1 million of the Fool's own money. They make dividend dynamos a key element in their overall strategy, and they let you know when to invest and give you a chance to buy or sell before they do.

If you'd like to invest with a service that picks the best of the best, then join us at Million Dollar Portfolio. If you'd rather see which dividend companies have already made the cut, simply click here to enter your email address and learn more.

This article was originally published May 28, 2010. It has been updated.

Jim Royal, Ph.D. , does not own shares in any company mentioned. Coca-Cola, Sysco, and Wal-Mart are Inside Value selections. Coca-Cola, Republic Services, Sysco, and United Parcel Service are Income Investor recommendations. The Fool owns shares of Altria, Coca-Cola, Sysco, United Parcel Service, and Wal-Mart. 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.