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.

Diageo (NYSE:DEO), for example, has beaten the S&P 500 by 37 points since April 2004, and it currently is rewarding investors with a 3.5% yield. Or consider Kimberly-Clark (NYSE:KMB), which has topped the S&P by 23 points since April 2008, atop a current 3.7% 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 five dividend picks that have also earned high ratings from the 140,000 members of our CAPS community:

Source: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and CAPS as of Nov. 12.

Any one of these quality companies would add some dividend pizzazz to your portfolio, but let's take a closer look at how Honeywell stacks up.

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.

To start with, we could say that Honeywell's balance sheet isn't exactly ideal. As of the most recent quarter, the company had more than $8 billion in debt on its balance sheet against total shareholder equity of $9.5 billion and a cash position of $2.6 billion. Financial conservatism would call for that debt-to-equity ratio to be a good deal lower. That debt, however, isn't much of a worry because the company has its interest payments well covered.

The comfort that the company doesn't provide on its balance sheet, it certainly makes up for when it comes to cash flow. Honeywell consistently produces far more cash than it needs to meet its capital spending requirements. That leaves plenty of cash to pay its dividend, buy back shares, and make acquisitions -- which have been a major growth driver for the company.

Honeywell also has a relatively encouraging dividend history. The dividend has been in place for decades, and for most of the time, Honeywell has delivered decent dividend growth. Investors should, however, take note of the period between 2000 and 2004, when the dividend stalled out at $0.75 per share.

As far as business stability, any company that focuses on the aerospace and industrial markets is bound to swing with economic conditions. The company's most recent quarter showed that it's definitely taking a hit from the economic downturn, but with a strong financial position and healthy cash flow, investors shouldn't have any concerns about the company not coming out of the recession with guns blazing.

What the bulls say
Honeywell may not be a five-star pick on CAPS, but more than 1,000 CAPS members have seen fit to give the stock a thumbs-up, versus just 59 who think it will underperform the rest of the market.

CAPS member EmmaBem gave Honeywell a thumbs-up over the summer and thinks the stock is about as close to "set-it-and-forget-it" investing as you can get:

Honeywell is a solid company and even with the down economy, is making big sales. Once business spending trends up, Honeywell will benefit even further. They pay a solid dividend, which is great for those income investors, but also look for the share price to give you another 5-10% appreciation year over year. Honeywell is no fly by night, and should not be traded as such, I'd say buy and hold for 2-4 years, look for a 25-30% growth, take your dividend payments and sleep easy at night knowing your money is about as safe as can be in an equity.

Get into the action
You can check out who else has been bullish on this stock, 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 into the dependable New York Yankees. And if you hate the Yankees, it's probably because they're so darn good, so darn often.

Fool Adam Wiederman thinks that a bubble is ready to burst in 2010, and that dividend stocks are the best way to beat that bubble.