The lowest-risk, most secure way to a great retirement is to invest in dividend-paying blue-chip stocks. That's what I'll attempt to convince you of in the next three minutes, because I think the case is absolutely overwhelming, and it's where I'm putting my family's money.

One caveat before we get started: Blue chips are not the way to grab slam-dunk, overnight returns -- you won't be eating caviar and vacationing in Majorca by next week. But because they produce steadily rising payouts and are the most solid companies around, dividend-paying blue chips are the surest way to guarantee that you'll have income when you need it most.

A case for blue-chip dividends
My case for dividend-paying blue chips is based on their rock-solid stability. You know stalwarts like Costco (Nasdaq: COST) are going to be alive and kicking in 20, 30, 40 years and more. Costco provides products that consumers will always need, has a redoubtable franchise, and continues to innovate aggressively. Better still, consumers have to do business with it in good times and bad, so it has minimal exposure to industrial cycles.

These types of companies have the security of broad-based revenue streams, high levels of investor confidence, and the access to financial markets that comes with such confidence. And all of that maturity and stability enables them to pay investors billions of dollars in dividends.

Not all dividends are equal, however, as the past few years have shown us. More than one formerly solid company had to cut dividends when the market tumbled -- think General Electric and Dow Chemical. Both are industrials that got stung by poor decisions in the midst of a downturn.

GE Capital suffered heavily during the financial crisis and the dividend cut shored up the company's balance sheet, while Dow suffered from a decline in demand and its refusal to complete a takeover of a rival. But even these stalwarts maintained a portion of their dividend, and could increase their payouts as their situations improve.

You want to invest in blue chips that have proven they are committed to maintaining and increasing their payouts over time, and a company that survived this recession without slashing dividends is a pretty solid bet.

Such businesses will reward your trust over the long term, as they've rewarded countless investors before.

Grow toward the good life
And it's this component -- increasing dividends over time -- that will secure you an income for life so that you never have to rely on a stock's appreciating in order to afford a vacation or the life you want. With blue-chip dividend payers, you can create an income stream that's much better than those from typical annuities.

To give you an example, look at seven high-quality companies that have treated investors to increasing payouts:

Company

Current Yield

5-Year Dividend
Growth Rate

Costco

1.3%

12%

Reynolds American (NYSE: RAI)

6.1%

13%

McDonald's (NYSE: MCD)

3.1%

27%

Novartis (NYSE: NVS)

3.8%

17%

ExxonMobil (NYSE: XOM)

2.5%

9%

France Telecom (NYSE: FTE)

8.3%

24%

Waste Management (NYSE: WM)

3.6%

9%

Already those yields beat almost any interest rate you could get from bank deposits. But the beauty of committed dividend payers is that their payouts go up over time without you having to reinvest those dividends. That last point is critical if you intend to live on your dividend income.

Each of these companies has a solid, recession-resistant franchise and a history of increasing payouts. Reynolds has capitalized on one of the great cigarette brands in Camel, whose consumers buy the product day in and out. McDonald's has perhaps the most recognized fast-food brand in the world, and its sales gains throughout the recession suggest its resilience. Novartis, a Swiss drugmaker, is as blue chip as Big Pharma gets, posting sales of $50 billion over the last year.

Many of use ExxonMobil's products every day, whether on the way to work or play, while Waste Management's trash collection we take for granted. Nevertheless, each has managed to grow its dividends by 9% annually for the last half-decade. It's tough to imagine a time when we won't need energy or trash collection, so these businesses look locked in for the long term.

The competitive advantages of Costco almost need no introduction, but the company has committed to being a low-cost leader. And France Telecom provides a fat payout from its lucrative operations in countries such as France, the UK, Spain, and Poland, among others. It's less French than you might otherwise think. The highly capital intensive nature of telecom means upstarts are unlikely to enter the market.

And to drive it home further, the world's greatest investor, Warren Buffett, owns at least one of the companies listed above.

Simple works
The simplicity of this dividend strategy is amazing. Consumer-focused brands are a great place to begin, but be cautious of businesses that are already facing significant headwinds, no matter how juicy their payouts.

Take Reynolds America, for example, which sports a heady 6.1% yield and has historically been one of the most generous distributors of cash. Given the current government pressure against cigarette smoking, it's hard to imagine Reynolds in the same form in 20 or 30 years -- and that may affect its long-term ability to increase dividends at a nice clip.

Hitch your wagon to these stars
Like Buffett, the experts at Million Dollar Portfolio are focused on "excellent businesses that mint money, including Costco and ExxonMobil -- both of which the service holds in its real-money portfolio. Million Dollar Portfolio buys the best of the best stocks from among Motley Fool newsletter recommendations, and advisor Ron Gross and his team manage a portfolio of more than $1 million of the Fool's own money. They make dividend dynamos a key element in their overall strategy, and they let you know when to invest and give you a chance to buy or sell before they do.

If you'd like to invest with a service that picks the best of the best, then join us at Million Dollar Portfolio. If you'd rather see which dividend companies have already made the cut, simply enter your email address in the box below.

This article was originally published May 28, 2010. It has been updated.

Jim Royal, Ph.D., does not own shares in any company mentioned. Costco Wholesale and Waste Management are Motley Fool Inside Value selections. Costco is also a Stock Advisor choice. Novartis is a Global Gainsrecommendation. France Telecom and Waste Management are Income Investor picks. Motley Fool Options has recommended writing a covered straddle position on Waste Management. The Fool owns shares of Costco and ExxonMobil. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.