I've noted before that dividend investing is a tried-and-true strategy for building long-term wealth. In fact, a study by Ned Davis Research found that dividend-paying stocks have outperformed their stingier counterparts 10% vs. 4% annually from 1972 to 2006.

In other words, you can generate sizable investment returns even during times of market turmoil if you can identify dividend stocks that will set you for life.

In order to find dividend studs like Caterpillar (NYSE:CAT) and Texas Instruments (NYSE:TXN), which have grown their dividends 15% and 31%, respectively, over the past five years, I used the Fool's new CAPS screening tool.

Below are five companies rated to outperform the market by more than 100 All-Stars, CAPS members whose track records rank them in the top 20th percentile of our 115,000-member investing community.

These stocks also have:

  • Market caps greater than $2 billion.
  • Dividend yields greater than 2%.
  • Four- or five-star ratings from our CAPS community.

Since we began tracking the collective intelligence of our CAPS investment community in November 2006, four-star companies have outperformed the market on average by 7% annualized. Five-star stocks did even better.



Dividend Yield

All-Stars Rating Outperform

Chevron (NYSE:CVX)

Basic Materials



Eli Lilly (NYSE:LLY)

Health Care



Nucor (NYSE:NUE)

Basic Materials



Verizon (NYSE:VZ)




Yum! Brands (NYSE:YUM)




Data from Motley Fool CAPS, Yahoo! Finance as of Oct. 3, 2008.

Remember, this screen is only a starting point in the research process. When selecting dividend payers, Fools know it's important to make sure a company has sufficient free cash flow to sustain and grow its dividends for years to come.

On Oct. 7, 2008, Fool co-founder David Gardner and his Motley Fool Pro team will invest $1 million in a portfolio designed to help you make money in any market. In the coming weeks, the team, relying heavily on proprietary CAPS "community intelligence" data, will establish long and short positions in a broad range of securities, including common stocks, publicly traded put and call options, and exchange-traded funds. To learn more about Motley Fool Pro and to receive a private invitation to join, simply enter your email address in the box below.

Ilan Moscovitz doesn't own shares of any companies mentioned in this article. He thinks the CAPS screen is the new four square. Eli Lilly is a Motley Fool Income Investor recommendation. The Fool's disclosure policy calls spikes.