The S&P's Best Dividend Stocks

These days, investors want the best of both worlds. They want stocks that will protect them against the inevitable downturns that the market throws at them. At the same time, though, they also want stocks that will make them money -- and increasingly, they want it in the form of healthy dividends.

Last week, I took a look at the 30 giant companies of the Dow Jones Industrials (INDEX: ^DJI) to find the cream of the crop among the average's dividend-paying blue chips. But beyond the Dow, there are hundreds of equally impressive large-cap dividend payers to choose from -- and among them, you'll find a select few that put even the best Dow stocks to shame.

I'll reveal my picks for the best dividend stocks in the S&P 500 (^INDEX: GSPC) later in this article. But first, I want to explain why I'm changing up my methodology slightly from last week.

Yield now and yield later
In my article about dividends and the Dow, I explained how high yields are only one component of a successful dividend-paying stock. If you focus only on top yields, you'll certainly get some smart picks -- but you'll also carry a much greater risk of buying into a financially shaky company that could find itself forced to cut its payout before you know it. That's not the kind of welcome you want to get from a stock you just bought.

By contrast, top companies don't just pay great dividends. They also align the growth of their businesses with the income they pay to their shareholders by regularly raising their dividend payouts. Over time, their dividend growth can play a bigger role in your total returns than increases in the stock price.

Last week, I used a simple methodology to pick top dividend stocks, picking companies that had the longest streaks of increasing their dividends. But that method has shortcomings as well. Although each of the Dow stocks that made my top dividend list had yields of at least 2%, applying the same test to S&P 500 stocks would include some stocks with much lower dividends -- levels that I think are unacceptable for a top dividend stock.

So to balance those competing factors, I started with the 2011 list of Dividend Aristocrats -- S&P 500 stocks that have increased their dividends every year for at least a quarter-century. To avoid duplications from last week, I took out all the Dow stocks on that list. But then rather than simply taking the longest streak, I ranked the stocks by yield and by length of streak and then combined the two rankings into a single score. The following were the best six stocks on that basis.

Sources: Standard & Poor's, S&P Capital IQ, Dripinvesting.org. As of Dec. 1.

Even this short list of six stocks provides a lot of diversity. With samplings from the pharmaceutical, utility, household-products, home-furnishings, and insurance industries, each of these companies has stood the test of time, surviving through numerous crises and emerging from each one a little bit stronger.

Honorable mention goes to CenturyLink (NYSE: CTL), whose 7.7% yield topped the list. However, although its 37-year streak would have been enough to get it into the top six, the company failed to increase its dividend this year, which means that it will fall off the S&P list when it picks its Dividend Aristocrats for 2012.

Get what you want and need
With the markets on edge, the comfort of strong dividend stocks can help you sleep better at night. As I see it, these six S&P stocks carry the best combination of healthy yields today along with dividend growth tomorrow.

Some readers might feel comfortable stopping right there. But if you just can't get enough great dividend picks, I totally understand. That's why I invite you to look at our newest special free report on dividend stocks, where you'll find 11 more prime picks that pay great dividends. It's an opportunity you shouldn't waste, so take a look before this offer ends.