"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."
-- John D. Rockefeller

In one of my previous jobs, I helped manage a group of large individual investment portfolios. Some, in fact, were nine-figures kind of large.

The biggest investing lesson I took from studying those successful portfolios was: Buy dividend-paying stocks and, most importantly, buy them early.

See, these portfolios contained long-term winners like Johnson & Johnson (NYSE: JNJ), which, in most cases, had been bought decades earlier and were now paying out tens of thousands of dollars in annual dividend income.

The owners of the portfolios didn't just pick stocks like J&J out of a hat of blue chips and hope for the best. No, they took the time to select companies with sustainable business models with a long track record of increasing shareholder value through capital gains and dividend growth.

That extra effort to handpick the perfect dividend stocks certainly paid off for them, to say the least, and they're reminded of their wise decision each quarter when their dividend checks roll in.

Your turn to build a dividend dynasty
Not all dividend stocks are created equal, however. Witness the recently slashed dividends from financial stocks like Washington Mutual (NYSE: WM) and Wachovia (NYSE: WB), which serve as a harsh reminder that dividend payments are not guaranteed. That's why it pays to study the company's free cash flow and payout ratio to make sure it can continue to pay dividends.

Before we get into all of that, however, let's get you a few dividend stocks to research. To get you started, we'll employ the help of 97,000 investors participating in Motley Fool CAPS and the new CAPS stock screener, which we will use to find dividend-paying stocks with:

  • Return on equity greater than 10%.
  • A dividend yield greater than 3%.
  • A four- or five-star CAPS rating.

Here are a few of the results:

Company

CAPS Rating (out of 5)

Dividend Yield

Plum Creek Timber REIT (NYSE: PCL)

****

4.0%

Waste Management (NYSE: WMI)

*****

3.1%

SYSCO Corp (NYSE: SYY)

****

3.1%

Paychex (Nasdaq: PAYX)

*****

3.3%

Philippine Long Distance

*****

3.9%

Data from Motley Fool CAPS and Yahoo! Finance as of 4/18/08.

These stocks appear to be promising, but this is not a list of formal recommendations. Instead, use it as a starting point for further research.

Neither the '90s R&B singer nor the tech company ... discuss
At a recent industry conference, SYSCO CEO Rick Schnieders told the audience, "We do better in more challenging times." Wall Street agrees. Despite rising food prices, tighter consumer spending, and other recessionary indicators, analysts actually expect SYSCO's earnings to accelerate over the next five years.

How can this be? For one, the company has a wide moat protecting its spot as the top dog in the food service and wholesale distribution industry. According to SYSCO's most recent 10-Q, they serve "about 15% of an approximately $225 billion annual market." Fifteen percent market share may not sound like a lot, but wholesale food service is a highly fragmented industry. This economy of scale advantage and its vast distribution network allow SYSCO to cut costs more efficiently than smaller local food distributors.

But let's talk dividends. SYSCO currently yields 3.1% and pays out a quarterly dividend of $0.22 per share. While dividends are never certain, SYSCO's are pretty close to it -- the firm recently paid out its 153rd consecutive quarterly dividend. What's more, SYSCO has increased its dividend each year that it's been a publicly traded company.

I don't see that trend changing any time soon. In its last fiscal year, ending June 30, 2007, SYSCO paid out just 55% of its free cash flow and 44% of its earnings.

Over on CAPS, investors remain upbeat about SYSCO going forward. Of the 474 players who have rated the stock, 443 think it will outperform the S&P 500. Only yesterday, CAPS player nemaline argued that SYSCO's top-dog industry status will keep it ahead of the competition, noting that it's the "market leader with a near monopoly and incredible distribution system. Despite fuel costs, this market drop provides an excellent opportunity to get into this dividend stalwart."

On the other hand, there are some vocal bears on SYSCO's CAPS page, too, including sehawk99, who, in September 2007, pointed to the stock's anemic capital gains over the past five years:

I don't see Sysco as having been a great investment to begin with. Over the past five years, capital appreciation is essentially non-existent. According to my Yahoo price chart, the stock price was just a notch above $30 five years ago. Today it sits at about $33. Pathetic. I suppose the somewhat meager dividend is the only redeeming feature.

So far at least, sehawk99 has proven prophetic -- SYSCO sits at just $28 per share today.

SYSCO's history of slow growth could change, however, if it comes anywhere near to achieving the analysts' estimates of 13% annualized earnings growth over the next five years. Interested investors should tune into SYSCO's next earnings report on April 28 to see if the company is moving forward or just plodding along as usual.

What do you think? Will SYSCO prove the bears wrong and provide dividend riches for patient investors, or will it succumb to higher food prices? CAPS' 97,000 investors are waiting to hear what you think. So sign up today -- CAPS is 100% free.

SYSCO and Johnson & Johnson are Motley Fool Income Investor picks. A free 30-day trial to the dividend-loving service can be yours by clicking here.

Fool contributor Todd Wenning is dividend-crazy, but he does not own shares of any company mentioned in this article. Washington Mutual is a former Income Investor pick. Waste Management is an Inside Value choice. The Fool's disclosure policy wallpapered its room with worthless Enron stock certificates.