5 Dynamic Dividend Stocks

The New York Yankees of the '50s and the Chicago Bulls and Dallas Cowboys of the '90s have one crucial element in common: consistent excellence in their organizations and performance. That's a rare accomplishment, but if you think it could never occur in your portfolio, think again. Carefully chosen dividend-paying stocks could be your key to superstar returns.

Build the next investing dynasty
These long-haul outperformers can help you build your fortune, as studies from investing gurus such as Jeremy Siegel have shown time and time again. Finding them is our Motley Fool Income Investor service's mission.

Petrobras (NYSE:PBR), for example, has beaten the S&P 500 by 71 points since August 2007, and it currently is rewarding investors with a 4.9% yield. Or consider Unilever, which has topped the S&P by 41 points since February 2005, atop a current 4.7% yield. While these stocks happen to be Income Investor recommendations, you don't need to be a subscriber to get these great gains.

Identify new talent
With the help of Motley Fool CAPS, we'll search for the best dividend-paying stocks around. Here are several dividend picks that have also earned high ratings from the 135,000 members of our CAPS community:

Sources: Capital IQ, a division of Standard & Poor's, and CAPS as of July 10.

Any one of these quality companies would add some dividend excellence to your portfolio, but let's take a closer look at why CAPS members think that Merck is worth a hard look.

Does my dividend have a glass jaw?
The last thing we want in a dividend-paying company is the risk that the company will fall off a cliff and have to pull back its dividend. This usually ends up being a double whammy, because not only do you lose your dividend payout, but many of the dividend-loving investors who own the stock will run for the hills, causing the stock price to fall.

With that in mind, there are three places that I immediately tune into when kicking the tires of a dividend payer -- dividend history, financial statements, and business stability.

Merck has been paying a dividend for an exceedingly long time. In fact, if you can remember when Merck didn't pay a dividend, you're probably either nearing your 60th birthday or got interested in stocks at a very young age.

While the length of time that Merck has been kicking out cash to its investors is encouraging, the payout has stagnated in the past few years as Merck's growth has faltered. The company's payout ratio has recently fallen back to a more manageable level, but it's questionable how soon investors can expect to see the dividend start climbing again.

Growth notwithstanding, Merck's financial statements give us another reason to like the company. Although Merck carries a significant amount of debt, its balance sheet sports an even larger balance of cash and cash equivalents. Plus, it has the interest payments on the debt well covered. Cash flow is also notably strong, with enough cash produced to easily fund both capital spending and dividend payments.

It's not much of a stretch to say that selling prescription medications is a relatively recession-proof business. Pharma is, however, also a hits-driven business, and the company's flatlining top line suggests that it hasn't exactly been pumping out the hits lately. Merck does have an R&D pipeline that it hopes will deliver some home runs though, and its megamerger with Schering-Plough (NYSE:SGP) should certainly shake things up.

What the bulls say
Merck has gotten its four-star rating by receiving more than 2,200 outperform ratings from CAPS members, against just 178 underperform ratings. The stock has an even better record among CAPS' top performing All-Stars.

One of those All-Stars, saunafool, has been bullish on the stock since September. This top-performing member extolled the recession-resistance of Merck and other big pharma companies, writing:

Here's a bet for you. Whoever wins the election isn't going to do squat about profit margins at pharmaceutical companies. Furthermore, no matter what happens to the economy, people are still going to take their medicine. All these companies are going to survive the turmoil better than most, and they'll still be standing, just like Elton John, 10 years from now, with compounded dividends aplenty.

Get into the action
You can check out who else has been bullish on these stocks, as well as chime in with your own thoughts by heading over to CAPS. You may also want to check out a few of the other top-rated dividend payers above while you're there.

Dividend stocks could help you transform your portfolio from the flash-in-the-pan Florida Marlins to the dependable New York Yankees. And if you hate the Yankees, it's probably because they're so darn good, so darn often.

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