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What’s sexy in the world of stocks today?

Despite a tough year for emerging markets (think China), maybe it’s still international stocks.

Maybe it’s the outpouring of love we’ve seen for social networking companies like LinkedIn and the upcoming prospects for Facebook.

You know what’s not sexy? Dividend stocks. You know what is totally beating the market right now? Dividend stocks.

This is either for you or it’s not
If you drive a high-priced Ferrari or Porsche, this article might not be for you. If you use a fancy financial advisor to manage your stock portfolio, then maybe you like the sex appeal of the high flying IPOs coming to the market. If you have multiple accessories for your dog -- you should probably just stop reading.

However, you should definitely read on if your ultimate aim is to:

  1. Preserve your wealth, and
  2. Provide yourself with income as you retire

In this article, I’m going to provide you with five amazing stock ideas, vetted by Morningstar and their top stock pickers, and then offer you a totally free report that gives you access to 13 additional stock ideas.

Why dividends, and why now?
After the financial crisis of 2008, companies worldwide cut back on just about everything. They laid off employees, cut back on perks, chopped dividends, and trimmed overhead wherever they could. The result today is that global companies have more cash on hand than they’ve had in ages. As of late March this year, U.S. companies were holding $1.9 trillion in cash -- a record not seen for a long, long time.

So many of them are now starting to put that cash to use by increasing their dividends and rewarding shareholders who have stuck by their side. In 2010, dividend increases in the S&P 500 went up 62% (from 157 to 255), and 2011 should shape up to be even better. For investors, this means greater gains in the market. Want proof?

While the SPDR S&P Dividend ETF (NYSE: SDY  ) has outperformed the general market so far this year, other more sector-specific ETFs have done even better. For instance, utility and real estate ETFs, particularly because of their strong weighting of dividend stocks, have fared more than a few basis points better than the market.

Dividend-heavy ETFs do well because they shell out consistent cash to shareholders, but academics and investors alike long have praised the ability of dividend-paying stocks to outperform their nonpaying brethren.

And not only have dividend stocks outperformed the market over the long-haul, but they provide investors income along the way. This is especially important for retirees as they learn to balance their income with expenses.

Despite the obvious allure of dividend stocks, investors still aren’t catching on. According to Morningstar, as of the end of May, inflows to U.S. stock funds were $25 billion, while inflows to bond funds were nearly $80 billion.

Give me those stock picks!
If you’ve stuck with me so far, then hopefully you’re at least partially convinced that dividends will help accelerate your portfolio. So in that fashion, I decided to try and find the best dividend stocks out there. Fortunately, Morningstar made this easy by offering some great advice.

They polled their “Ultimate Stock Pickers” (their top 26 managers) and found stocks that were the most widely held by all of them. The only criterion was that the stocks were held by at least five of the managers, and that they paid a minimum yield of 3.5%. Below are some stats on five stocks they chose:

  Dividend Yield Payout Ratio Years Paying Dividend
Vodafone (NYSE: VOD  ) 6.1% 56.1% 21 years
Nestle (OTC: NSRGY.PK) 3.5% 15.9% 10 years
Eli Lilly (NYSE: LLY  ) 5.3% 44.5% 29 years
GlaxoSmithKline (NYSE: GSK  ) 5.1% 179.1% 24 years
Total (NYSE: TOT  ) 5.8% 42.8% 19 years

Source: Morningstar data; Capital IQ, a division of Standard & Poor’s

With the exception of GlaxoSmithKline, each company has a fairly reasonable payout ratio (which means there is room for dividend growth), and each company has been consistently paying dividends for quite some time. Although this doesn’t necessarily mean complete success moving forward, these are great indicators that the five companies above are truly solid dividend plays.

U.K.-based Glaxo might have a high payout ratio, but it churns out tons of free cash flow, and has a more reasonable free cash flow payout ratio of 69.6%, which assures me that their dividend is in no danger. I especially like Glaxo because at a time when pharma companies are finding fewer opportunities in developing countries, Glaxo has decided to focus on emerging markets. It has partnered with generic drug manufacturers like Dr. Reddy’s Laboratories (NYSE: RDY  ) in India, and has formed deals with companies everywhere from South Africa to Argentina. In fact, 70% of their revenue stream comes from non-U.S. markets -- emerging markets revenue in particular increased 22% last year.

In addition, the company is diversifying its range of products and has jumped into vaccines and consumer products like sleep aids and heart burn remedies. This will help them boost revenues as patents have expired in recent years and their blockbuster drugs cease to bring in the dollars they used to. Furthermore, the company announced a $1.6 billion share buyback that illustrates management thinks the stock is at a reasonable price and that it should continue generating earnings for years to come.

If these kinds of companies interest you -- ones with stable yet high dividends with room to run -- then you’ll definitely be intrigued by a new report created by The Motley Fool. Today you can download “13 High Yielding Stocks You Can Buy Today," totally free, by clicking here.

Jordan DiPietro owns no shares. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of Total, Vodafone Group, Dr. Reddy's Laboratories, and GlaxoSmithKline. 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 Motley Fool has a disclosure policy.

Read/Post Comments (6) | 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 June 16, 2011, at 9:24 PM, hank321 wrote:

    Dividends from non-US companies are taxed differently (less advantageously) than US dividends, however,....correct?

  • Report this Comment On June 17, 2011, at 3:08 AM, PeakOilBill wrote:

    Drug stock always scare me. I remember the Fen Fen diet drug thing. I imagine them selling a new drug that turns people into zombies in 3 years or so. SELL ! SELL ! SELL ! on that news.

    Total will work. The safest stocks are things that can't be sent to China or turned into commodities that you can't make a lot of profit on. Think big oil, (peak oil IS coming people) giant telecoms, and utilities. They can't be shut down either. There is almost no chance of them ever going instantly bankrupt. They own enormously valuable real assets. I can't believe how much money I send AT&T every month to use their wires & automated switching gear. You won't get rich on them like an early Apple or Google, but you won't watch inflation gradually eat your wealth either. If the market tanks, just don't sell, and continue to collect the dividends.

    Peak oil will eventually make the oil companies go WAY up, but you may have to wait 10 years. If you sit in the super majors, you can cash the checks while you wait for their stocks to double, then triple, then get nationalized when things REALLY get bad. But in the USA, you must get paid for your property. That is in the US Constitution.

  • Report this Comment On June 17, 2011, at 9:45 AM, energysystems wrote:

    hank321-It depends country by country. Total(hq'd in france) for example for shareholders in the US gets a 15% dividend tax withholding hit. Vodafone on the other hand, is hq'd in the UK, which has a 0% dividend tax withholding rate with US shareholders.

  • Report this Comment On June 17, 2011, at 10:47 AM, gimponthego wrote:

    "According to

    economist Mark Mitchell, because of the 1982 product tampering,

    Johnson & Johnson "suffered a $1.24 billion wealth decline (14 percent

    of the fore- casted value of the company) due to the depreciation of

    the company brand name and the Tylenol brand name" However, being proactive with the tamper proof seal..J&J bounced back stronger than ever.

  • Report this Comment On June 17, 2011, at 3:19 PM, GregLoire wrote:

    @ hank321

    Yeah, taxes can be tricky, which is why I generally avoid dividend-paying ADRs. Some additional info here:

    There are some exceptions, though. I own FLY and no additional taxes were withheld -- I think in some cases you can be exempt, as they mention on their website:

  • Report this Comment On June 26, 2011, at 9:29 PM, lqs101 wrote:

    i hadn't heard of this approach to identifying dividend stocks before. i like the simpleness of it. and the line about the dog accessories...


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