Editor's Choice

Dividend-Paying Companies: A Job Where You Don't Have to Work

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So, this is Christmas. And yeah, my two girls got toys and clothes and such. But they also got checks from various grandparents, like always.

I suppose some parents just cash the checks and give the money to their kids. Not us. We're big, meanie parents who only let the girls have 10% of what they're given. The rest goes into a savings and investment account for each of them. It seems … well … prudent.  It's added up over the years, through saving and investing they'll both have solid five-figure accounts when they start out in life.  It's more than either of us had when we got out on our own.  My kids won't eat ramen in their first apartment (unless they want to, I guess).

This year, for my 8-year-old, I took the several hundred dollars she received and invested it in McDonald's (NYSE: MCD). For the 12-year-old, I chose ConocoPhillips (NYSE: COP). She's got a shorter time frame until she's 18, after all. I didn't choose these two out of a hat. There's a method to how I invest my girl's money. It's not mine; after all, I need to have a plan.

Both of them have one of the things I love best in a solid stock: high dividend yields. I've always viewed dividends, and a company's history of paying them, as a strong indicator of how confident the company is about its long-term profitability. Show me a blue chip stock with a dividend above 3% and I'll show it some love. It will have earned it.

The important thing for the investor to remember about dividends was summed up by my 8-year-old this morning. I was driving her to school and she asked about the money she got (she wants to buy a bike). I told her I'd invested her Christmas money in her favorite restaurant, McDonald's. When she asked why I told her that McDonald's would pay her to own the shares every year. Her reply? “Wow, it's like having a job without having to go to work.”

It's like having a job without going to work. Let that roll around in your head for a while.

Dividend-paying stocks, in addition to whatever growth they (and you) might enjoy, also pay cash each year to those who own the shares. So you benefit from the growth of the stock, and along the way you get some extra return. Like having a job without going to work.

As a former investment rep, with a company I won't name unless they give me permission at some point, I was big on making recommendations of stocks with high dividends to my clients. There's just too much to miss out on by avoiding them. Here are some of my favorites.

McDonald's: As mentioned above, MCD is a strong stock and features a dividend yield of 3.40%. While not the highest dividend on this list, betting against the growth of a firm like McDonald's is silly. It has a strong record of performing and should continue to do so. The company knows what it's doing, how it plans to grow and market its product, and has the muscle to get there.  The P/E of 17.07 doesn't hurt, either.

ConocoPhillips: Again, I've bet my own children's money on COP. It's hard to go wrong in energy stocks these days and ConocoPhillips is a good, solid energy investment. With a dividend that's pretty darn high at 4.46% it can return some real money to you if you hold it long enough.

AT&T (NYSE: T): Another great dividend stock. The telecom giant provides investors with a 5.14% dividend each year. Their board, which sets the dividend, is strong and confident of the firm's long-term success. And a P/E of 45.43 shows that the market has some serious faith in it as well.

Merck (NYSE: MRK): The pharma monster is a high flyer. As of this writing (before the market opens on Jan. 4) it was up more than 2% yesterday and I see no reason it couldn't be stronger. Merck's board has set the firm's dividend at 43 cents per share for a 4.06% yield. It's hard to not like big pharma as the American and European public continues to age into needing more healthcare.

General Electric (NYSE: GE): I know, GE is boring. That's what I told my clients. However, when you're playing the markets boring is good. Boring is reliable and safe. GE knows what it does and does it well. They have a fine product line and distribution system. A dividend that hits 3.6% doesn't hurt. Sure, it's not exciting. But excitement in your investments tends to be the painful kind of excitement, not the exciting kind of excitement.

Remember, when you're looking for long-term stocks (which you should be) always look for good dividend payers. That, combined with some other info, will show you not only how the market thinks the stock will do, but how well the board, which has move info than anyone, thinks they'll do.

Plus, heck, it's like having a job without going to work. And who doesn't want that, right? Out of the mouths of 8-year-olds comes wisdom. Truly, it does.

Nate Wooley has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company and McDonald's. Motley Fool newsletter services recommend McDonald's. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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