Now more than ever, dividend stocks are a good play.

Why's that?

If you missed it, my colleague Morgan Housel explained earlier this month that stocks yield more than bonds.

Specifically, the average dividend yield of the Dow 30 stocks slipped past the 10-year Treasury bond yield. Historically, bonds have yielded 3.8% more than stocks since stocks also provide the prospect of capital appreciation. But with investors turning to Treasuries out of fear and the Fed working actively to keep rates low, 10-year bond rates are yielding a paltry 2.9%.

For that reason alone, investors who want the promise of a steady stream of income may want to increase the dividend-paying portions of their stock portfolios.

But I'm just getting started
Don't be fooled into thinking dividend stocks are just for those nearing retirement, though. For fans of growth stocks, a study by Robert Arnott and Clifford Asness actually links higher dividend payouts to higher earnings growth. Further, Wharton professor Jeremy Siegel has studied the dividend situation and concludes: "Through the years, diversified portfolios of stocks that pay dividends have not only beaten those that don't, but have also handily outperformed the S&P 500."

That may surprise you.

The chance for big returns isn't what many investors expect from steady dividend payers.

Here's the thing. A company, unless suicidal, won't institute a dividend unless it plans on paying it for the long term. It's signaling to the market that its operations are steady and self-sufficient enough to start returning capital to its investors. The danger to a company that lowers or suspends its dividend is frequently a violent market reaction on the down side.

From a management standpoint, paying a dividend instills discipline. When government departments get their budgets each year, there's a use-it-or-lose-it mentality. The same is true for company departments -- there's always an extra project to justify. But by taking a portion of this capital away, managers are forced to allocate their capital to their highest-priority, highest-value projects.

Where are the biggest, baddest dividend payers?
For those looking for some of these dividend plays, Standard & Poor's helps us out. Each year, they construct a list called the Dividend Aristocrats. These are "large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years."

Yes, you read that right. 25 years.

Only a few dozen companies make the list. Here are the seven with the highest dividend yields.



Market Cap

Payout Ratio

P/E (trailing)

Dividend Yield

CenturyLink (NYSE: CTL)


$10.7 billion




Pitney Bowes (NYSE: PBI)

Mail processing equipment

$5.1 billion




Cincinnati Financial (Nasdaq: CINF)

Property casualty insurance

$4.5 billion




Integrys Energy Group (NYSE: TEG)


$3.8 billion




Eli Lilly (NYSE: LLY)


$41.1 billion




Consolidated Edison (NYSE: ED)


$13.3 billion




Leggett & Platt (NYSE: LEG)

Home furnishing components

$3.0 billion




Sources: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.

Does that list surprise you?

For one, you may be surprised that the dividend yields aren't in the double digits. Our dividend expert, Income Investor advisor James Early mentioned to me that he considers double-digit yields to be a warning sign for dividend unsustainability. So it makes sense that companies that have paid dividends for decades aren't quite at that level.

For another, you may not have heard of some of these companies. To be sure, familiar companies like McDonald's and ExxonMobil made the list, but their dividend yields of 3.1% and 2.9%, respectively, aren't among the top seven yielders.

It's impressive that these seven stocks top the heap, but that alone isn't a compelling reason to blindly jump into them.

Just because they've increased dividends over the past 25 years doesn't mean they can't lower or eliminate their dividends next month.

One factor to consider is their future growth prospects and any industry headwinds. CenturyLink and Pitney Bowes, for example, face tough prospects in telecom and mail services, respectively. CenturyLink has been forced to grow by acquisition; it bought Embarq last year and is in the process of merging with Qwest. Pitney Bowes is a dominant player but faces the threat of the Internet reducing mail volumes permanently.

I included their payout ratios -- the percentage of their earnings that they've paid out as dividends -- as a first step in due diligence. Ideally, you'd want to see a big dividend yield and a low payout ratio (less than 50% is preferred). At a payout ratio more than 100%, dividends are exceeding current earnings. That's the case for Integrys Energy.

Warnings out of the way, these seven companies are worth looking into to determine if their impressive dividend histories mean impressive dividend futures. Share your thoughts on them in the comments section below.

For more dividend talk, check out my response to those who think dividends are dumb by clicking here.