10 Terrific Dividend-Paying Stocks

THE WHIPSAWING OF SHARE PRICES OVER the past two years has left many investors anxious and uncertain. For the young, there's plenty of time left to make up big stock losses. But for anyone who recently retired, or plans to do it soon, the 2009 rally has effectively applied a Band-Aid to a wounded pension portfolio that probably required a tourniquet.

Equity prices remain 30% below their 2007 highs. With Americans generally living longer, longevity risk -- the chance that you'll outlast your portfolio's ability to support you -- is rampant, with good reason: U.S. Census statistics indicate that the average 65-year-old man can look forward to nearly two more decades of life, with women likely to live even longer. All this points to the importance of investments that can withstand the long test of time. One of the most important groups is dividend-paying stocks, and Barron's has identified 10 that look particularly good for the long haul.

Before we get into specifics, a little more background: A study of 1,000 Americans done by Scottrade in January found that 75% of the polled baby boomers -- Americans born anytime from 1946 through 1964 -- fear that full retirement won't be an option for them. Says Scotttrade's chief marketing officer, Chris Moloney: "They don't have a lot of time to recover. The financial crisis [and the crushing stock swoon that ended last spring] has given them a one-two punch: a huge drop in their portfolios and a slow economy. With current living expenses, it has become difficult for them to add to their pension portfolio."

These folks might be forced to alter their plans, accepting a lower standard of living in retirement. Says Susan Wilson, 61 years old, a database administrator for the University of New Mexico in Albuquerque: "The market has come back, but I'm still nowhere near where I was. I may work longer than I thought. And even when I'm done working, I'm not sure I'm going to have the life I pictured two or three years ago."

If there is a silver lining, it's that it is probably an auspicious time for buying and holding large-cap, high-quality, dividend-paying and dividend-growing stocks. "Right now, you can find leading blue-chip, high-quality stocks at below-average multiples that are raising dividends," says John Carey, a fund manager at Pioneer Investments. That is all the more precious in a year that has seen some of the worst dividend cuts in a half-century. Standard & Poor's says 78 companies have cut their payouts by a combined $48 billion in 2009. Last year, 62 trimmed their dividends.

Low-quality stocks, which generally don't pay dividends, have been driving this rally, says Nicolas Simar, who runs the ING (L) Euro High Dividend Fund, "but in the rally's second phase, the high-quality stocks will be the drivers." And if the rally fades, they offer downside protection through their dividend income.

Matthew McCormick, a money manager with Bahl & Gaynor Investment Counsel in Cincinnati, argues dividend stocks are likely to outperform now because they have been laggards. "They offer stable earnings, and you can count on the dividend more than on capital gains or price appreciation" over any particular period of time, he adds.

Over very long periods, say 30 to 40 years, small-caps outpace large-caps due to higher growth potential. But this comes at a price retirees aren't eager to pay: higher volatility. As Thomas Wilson, a principal in William Blair Private Wealth Management, puts it: "Volatility isn't your friend when you need to make consistent withdrawals."

Over 20 years -- the period most retirees are concerned with -- high-quality, large-cap dividend stocks often outpace the market on a risk-adjusted basis. They don't rise as much in whiplash rallies, like the one we're in, but they go down less when the market buckles. And with the oldest boomers beginning to retire, demand for them will rise, McCormick maintains, helping to support their prices.

Dividends are important for any investor. Depending on which study is consulted, results show that payouts account for nearly half the total return of equities. And in some decades, like the 1930s, 1940s, 1970s and the current one, dividends are significantly more important than capital gains (see table nearby).