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Ten Dividend Stocks to Pad Your Portfolio

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Strategists recommend playing it safe with income generation.

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The US economy, looking ahead, will suffer sluggish growth and investors should take heed, putting capital to work in stable, money-making companies that can afford to pay them some steady income.

So say heavy-hitting investment strategists, including bond kingpin Bill Gross and noted economist Gary Shilling. Both gurus recently weighed in, independently urging investors to move more of their money into dividend yielding stocks.

But which stocks make sense?

We checked in with research analysts for the top 10 dividend payers as well as a worthwhile exchange-traded fund that investors could employ for this theme.

Gross, the mild-mannered managing director of PIMCO, recently spoke at a Barron's roundtable where he laid out his case for slower growth in the years ahead, including the second half of 2010.

There are three reasons for this, Gross said: "One is deleveraging -- paying down debt -- a process now under way. Number two is re-regulation, which hasn't taken place yet. Number three is de-globalization. Various countries around the world will produce slower growth than what we've grown used to, and this leads to lower returns on assets."

As for investment implications, Gross advised investors to seek out picks that will generate stable income.

"A bird in the hand -- that is, dividends -- is to be favored relative to the growth rate in the bush. In both fixed income and equity, look to stable, conservative income generation," he said.

Gary Shilling, founder of A. Gary Shilling & Company, echoed this outlook in his latest commentary to clients. The economist and strategist, laying out his investment themes, told clients to buy dividend payers.

"With a slowly growing economy and deflation, corporate profits growth will be sluggish," Shilling wrote. "Add in declining P/Es in the years ahead and stock appreciation in nominal terms may be minimal. In this environment, dividends will be critical to total stock returns, and companies that have meaningful, reliable and rising dividend yields will be in favor."

If investors agreed with Gross and Shilling, and were looking for stocks that shell out meaty, dependable dividends, which ones would do the trick?

Taking a step back, the S&P 500 sectors with the highest dividend yields right now include Telecom, which leads the way with a yield of 6.10%, followed by Utilities (4.43%), Consumer Staples (3.01%), Industrials (2.29%), and Energy (2.13%).

Sectors trailing the S&P 500's dividend yield of 2.03%: Tech (0.98%), Financials (1.24%), Consumer Discretionary (1.57%), Materials (1.95%), and Health Care (2.02%), according to S&P Indices.

In terms of specific stock picks, Brett Horn, Morningstar's associate director of equity research, has some ideas for us. He recently rifled through the holdings, purchases, and sales of top-notch mutual fund managers to find stocks offering attractive and sustainable dividends.

The top 10, says Horn, include: AT&T (T), Philip Morris (PM), Exelon (EXC), Diageo (DEO), ConocoPhillips (COP), FPL (FPL), Pfizer (PFE), Sysco (SYY), McDonald's (MCD), and Chevron (CVX).

Horn emphasizes the important, positive signals that dividends relay about a company.

"When you see a healthy dividend, and you see a commitment to that dividend increasing over time, it's a flag that you've got a management team that is disciplined with its capital allocation," he tells Minyanville. "You know that they will do the right thing by shareholders with that free cash flow."

Alternatively, for those investors that would rather play this theme with an ETF, Morningstar analysts recommend Vanguard Dividend Appreciation (VIG), which they applaud for its low expense ratio (0.24%) and focus on large, profitable US companies with strong competitive advantages.

One possible cause for concern, for those investors hunting the indexes for dividend payers, is highlighted by Dr. Ed Yardeni of Yardeni Research.

He points out that, when the Bush tax cuts expire, the dividend tax rate will revert back to the individual's ordinary income bracket, which for top earners will be 39.6%.

"In my opinion, the rate should be lowered to zero," Yardeni argues. "It is time to end the double taxation of corporate income."
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No positions in stocks mentioned.
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