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TheStreet Open House

5 Dividend Champs to Buy for 2013

Stocks in this article: TJXDRICHHGRMNHAR

BALTIMORE ( Stockpickr) -- Ask an income investor what the most important metric is when investing for income, and the answer is bound to be yield. Yield, the percentage of a stock's share price paid out in dividend income, is a critical number, no doubt: It tells you how much you're going to get paid. But the best dividend stocks aren't always the names with the biggest yields.

In fact, some of the best dividend payers aren't high-yield stocks at all -- they're companies that pay out 1% or 2% a year in dividend income. Don't follow? Allow me to explain.

>>5 Huge Stocks to Trade for Gains

A wise portfolio manager once told me years ago that you should never chase yield; a stock, after all, can far more in a single day than it yields in an entire year. And often, excessively high yields are a warning sign, inicating that a stock's share price has been falling and that its payout is unsustainable.

So instead of chasing yield, we're chasing the dividend champs today.

To fall into the group, a stock has to meet a couple of criteria. First, it's got to pay a growing dividend that's beat inflation over the last few years. Second, its share price has to have managed to keep its head above water over that same time period. While those criteria are pretty loose, only a handful of stocks made the cut.

>>5 Stocks Under $10 Set to Soar

I've said before that we're in a toxic environment for investors. Interest rates are smashed as close to zero as they can get, while the Fed keeps its foot floored on the inflation accelerator pedal. With so many investors willing to take a penalty to jump into the safety of "risk free" assets such as treasuries, these dividend winners offer a much more attractive alternative.

They don't just beat treasuries right now. Dividend payers historically beat all other stocks as well.

Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.

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