Dividend-paying stocks are usually purchased as a long-term investment, which qualifies the dividends for a lower tax rate. Dividends can be reinvested to compound earnings. In volatile markets, dividends also provide a measure of security because the presence of the dividend provides incentive for investors to buy, or at least hold, stocks, and compensates for short-term losses in stock price. The best dividend-paying stocks are not those with the highest yield, but with the greatest ability to sustain and increase the dividend. Inevitably, the best dividend-adjusted performers will be small- or mid-cap stocks with room to grow. On a risk-adjusted basis, some large-cap stalwarts are more attractive to investors.
With a £1.0 per share dividend, AT&T looks like one of the most attractive dividend stocks. Its exclusive deal with Apple and immunity from the federal government against wiretapping charges have helped this phone company maintain its footing in the world of wireless communication. Look for net neutrality to cede ground to cyber security and increase pricing power.
Occidental Petroleum (OXY)
With proved reserves of 2,978 million barrels of oil equivalent at the start of 2009, Occidental Petroleum is well-levered to the price of oil, which is likely to remain high. The steady income and relatively safe location of its wells should keep this dividend, currently at 80p, a steady grower.
In the face of a health food revolution, McDonald's has demonstrated remarkable flexibility and resilience. The fact that it continues to grow its worldwide indicates this company will likely outlast all of us. At a 3.6 per cent yield ($2 per share), the Golden Arches pays better than Treasuries for arguably less risk.
Waste Management (WM)
Though not a stock that is likely to zoom in a strong economy, garbage is a steady business and Waste Management is tops in trash. Its yield of more than 4 per cent (70p per share) is backed by steady revenues and cash holdings.
A holding of Warren Buffett's Berkshire Hathaway, Kraft is a famous brand with a tight grasp on several food and beverage markets. Despite some turbulent times, the company is on solid footing under new management and is well capable of maintaining its $1.16 per share dividend.
Bank of America (BAC)
As a speculation on future dividend growth, Bank of America could be one of the best dividend-adjusted performers of the next decade. Though humbled along with other financial stocks in 2008 and 2009, there's only one way to go with its current $.04 per share dividend: up.
One of the rare dividend-paying tech stocks, Intel has proven its resilience through the bursting of the tech bubble and retains its dominant position in the integrated circuit market. At 30p per share, its dividend still represents a reasonable yield of about 3 per cent. Though it could have difficulty maintaining its margins, the dividend itself is under no threat and any decline in the stock price will only increase the yield for new buyers.
Johnson & Johnson (JNJ)
The nice £1.20 per share dividend makes holding onto this consumer staples producer an attractive proposition. For 46 years, its increased its dividend at an annual rate of more than 13 per cent. With a strong research and development division and a range of well-established health care products, this company could actually see a boost no matter which way the health care system evolves.
This domestic steel manufacturer will undoubtedly be a beneficiary of economic recovery and growth. Its 90p per share dividend is supported by cash on the balance sheet and is only likely to grow along with the economy.
3M Company (MMM)
At £1.30, 3M has the highest nominal dividend on this list. At a share price of £46, it still boasts about a 3 per cent yield, which is quite attractive for a diversified technology company with products in both economically sensitive (consumer and office) and insulated (health care and security) segments.