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. Even better, you can prudently and safely use options to boost that income power further, helping you make money in any market.

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 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 seven high-quality companies that have treated investors to increasing payouts:


Current Yield

5-Year Dividend
Growth Rate

CenturyLink (NYSE: CTL  )



ExxonMobil (NYSE: XOM  )



Kimberly-Clark (NYSE: KMB  )



Clorox (NYSE: CLX  )



Johnson & Johnson (NYSE: JNJ  )



Yum! Brands (NYSE: YUM  )



Intel (Nasdaq: INTC  )



Data from Capital IQ, a division of Standard & Poor's.

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, and most are household names. ExxonMobil has the power of energy on its side, and as energy prices soar higher year after year, the integrated oil major is poised to do well. You might not actually see Intel's product, but you know it's probably been inside almost every computer you've ever used: that dominance allows it to pay such a nice dividend. Another megacap, Johnson & Johnson, has enjoyed the confidence of consumers for years, whether for its over-the-counter products or its more specialized medical goods.

You might not know the name Kimberly-Clark, but surely you recognize its leading paper products brands that include Huggies diapers, Kleenex tissues, and Scott paper towels, among many others. Both Yum! and Clorox offer products that we use every day and that we'd prefer not to skip, if given the choice. Yum! is the name behind Taco Bell, Pizza Hut, and KFC, and offers an amazing growth opportunity in China in addition to plenty of support in the U.S. And Clorox is much more than bleach and detergent, with a product portfolio that includes food and charcoal brands as well.

Finally, CenturyLink provides telecom services to customers in the U.S. For most people and businesses, the last thing you'd do is cut the telecom cable. Its massive dividend growth rate is due to acquisitions and will have to eventually come down somewhat.

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 CenturyLink, for example, which sports a heady yield of 6.5%. The telecom industry is very competitive and massive changes are under way, so the industry and company will probably be quite different in a couple of decades. That pressure will likely affect its ability to increase dividends at a steady clip.

Hitch your wagon to these stars
Even better, you can safely use options to boost the power of these cash-gushing companies. The experts at Motley Fool Pro are focused on stars such as Intel, which can be used to generate substantial income AND nice capital gains through the power of options. And Pro has done both with Intel over the last two turbulent years in the market.

If you'd like to invest with a service that is focused on generating income in any market, we're opening Motley Fool Pro for a few days on Tuesday, Jan. 18, 2010. The service has been closed to new members since June. To learn more and receive a private invitation to join, simply enter your email address in the box below.

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

Jim Royal, Ph.D., does not own shares in any company mentioned. Intel and Wal-Mart are Inside Value selections. Wal-Mart is a Global Gains selection. Clorox, Johnson & Johnson, and Kimberly Clark are Income Investor recommendations. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of ExxonMobil, Johnson & Johnson, Wal-Mart, and Yum! Brands. Motley Fool Alpha owns shares of Johnson & Johnson. 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.

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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 January 12, 2011, at 7:57 PM, fg22 wrote:

    Blue chip dividend investing is a great theme for the long haul and also very smart in a world of $90+ oil. Very much agree with CLX and KMB, especially at these valuations. Also like UN and CL, both of which pay nice dividends and provide currency diversification. Keep up the good work!

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JNJ $113.06 Up +0.16 +0.14%
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