The World's Best Dividend Play

The importance of investing in dividend stocks has been outlined and documented for decades. Those who have been fortunate enough to heed dividend-oriented advice have been able to grow and preserve their wealth for years on end.

Today, with Treasuries and interest rates at all-time lows, it's as important as ever to consider dividends essential to any portfolio. That's why I've taken the time to provide you with the 42 most promising and stable dividend stocks, and used my own criteria to offer you the world's best dividend play.

My, oh my, how things can change!
In the late 1990s and early 2000s, technology and growth stocks were understandably all the rage -- that is, until the dot-com bubble burst and brought down with it many crazy-high stock prices. In the middle of the decade, housing and financial companies hit peak levels, as lax lending and the subprime boom led to record property prices. Then, of course, that bubble burst, too.

Today, dividend investing is the shiny toy that everyone seems to be so interested in. Is it just a fad? That, I cannot answer. However, I can say that before you jump in headfirst, there are a few things you need to be wary of.

High-yielding stocks can be extremely attractive not only because Treasuries are so low, but because reinvesting dividends can be a great way to achieve wealth over the long term. Yet sometimes, as my dad used to tell me, "If it seems too good to be true, then it probably is."

Who are these high yielders?
Let's check out a few examples.

Companies like Annaly Capital (NYSE: NLY), Chimera (NYSE: CIM), and Hatteras Financial (NYSE: HTS) all pay outstanding dividends above 14%. Because these companies are real estate investment trusts (REITs), they are required to distribute at least 90% of their taxable income to investors, hence their very high dividend yields. Its these huge payouts that attract investors. Who wouldn't want to lock in a great 14% dividend over the next few years while Ben Bernanke and friends keep rates at insanely low levels?

First, we must consider if these dividends are sustainable. Any change in the Fed's interest rate policy could drastically eat away at these companies' business model, as they depend on cheap borrowing to generate earnings. In addition, there's always the chance (slim, though it may be) that legislation will be passed to remove federal guarantees for Fannie Mae- and Freddie Mac-type securities. I'm not saying the above companies are not good investments. In fact, my Foolish colleague Ilan Moscovitz recently suggested readers buy Annaly Capital. I'm just reiterating all the facets one must consider before following the herd into what could be high, yet unstable dividends.

Other companies paying really high dividends include Frontier Communications (NYSE: FTR) and Windstream (Nasdaq: WIN), both above 7.5%. That looks great on the surface, but are these dividends going to be left for dead? They each have extremely high payout ratios (which could point to an unstable payout) and neither of them exactly has a bright future in terms of growth. As domestic, rural telecom providers, expansion and investor excitement isn't exactly boiling over. In fact, both companies are expected to see zero or negative growth over the next five years. Again, just something to reflect upon before you buy one of these companies.

The world's absolute best
Many of you have probably heard of the S&P 500's Dividend Aristocrats, but for those of you who have not, let me introduce you.

The Aristocrats is an elite group of blue-chip, large-cap stocks that have been able to increase their dividend, every year, for at least 25 years. This is obviously no easy feat as these companies have to combat recessions and cope with booms and busts, but still they've managed to increase shareholder wealth. These companies really are the cream of the crop; over the past five years the Aristocrats have averaged a 3.32% annual return while the general index has earned only a measly 0.42%.

In 2010, 42 companies made the list, so I screened for the company with the highest payout and found CenturyLink (NYSE: CTL), a U.S. telecom provider with a 6.7% yield. Although it's an Aristocrat with a great yield, the company is only supposed to grow by 0.44% in the next five years -- not exactly what I would call a stock that will see great growth in its stock price.

So instead, I screened the Aristocrats list for stocks that had the largest yields, the highest five-year growth rates, and the lowest payout ratios. The stock I chose from this even more select group, while it may shock you, is what I now consider the world's best dividend stock.

And the winner is ....

Source: Capital IQ, a division of Standard & Poor's

I know, I know -- this is probably not the exciting, fresh, new idea you were anticipating. But let me explain!

A $50,000 investment with a 3.1% dividend yield would generate more than $40,000 in extra value over 20 years if you reinvested your dividends, even if neither the stock price nor the dividend payout changed over that time. Considering that McDonald's has every incentive to increase its yield over time, you can certainly expect to reap much more than that in pure dividend-loving profits.

And even more important, McDonald's is a blue-chip stalwart that you can count on, in both bull and bear markets. The company has one of the most prestigious brand names in the world, estimated to be worth about $33.5 billion, according to Interbrand. In times where U.S. consumers may be eating out less, McDonald's can count on its international exposure to carry the weight; 40% of its revenues are derived in Europe while another 20% come from Asia and the Middle East. This not only helps diversify revenue streams, but also gives you some added currency exposure as the dollar continues to decline.

Still don't think McDonald's can see a surge in its stock price? Consider this: In the past 10 years, while a typical S&P 500 ETF gained just 0.7% annually, McDonald's saw a dramatic 12.9% annual compounded rate of return. Not too shabby for an old blue chip, huh?

Now, I'm not saying you should avoid all stocks with eye-popping dividend yields, but most of the time, they just aren't as stable as you would want your portfolio to be.

If you're interested in more opportunities like the one above -- high yielders with room to grow and a history of success -- click here to get The Motley Fool's five-page free report, 13 High-Yielding Stocks to Buy Today.