See all our 2010 stock picks.You can also see Cramer's New Dividend Portfolio.



) -- A shaky economy and subdued consumer spending mean undervalued,

dividend-paying stocks

may outperform next year. Two top picks are


(KMB) - Get Report



(CTL) - Get Report



Kimberly-Clark's third-quarter profit surged 41% to $582 million, or $1.40 a share, as revenue declined 2% to $4.9 billion. Its operating margin widened from 13% to 18% as the Dallas-based company raised prices for its products, which include Huggies diapers and Kleenex tissue, and cut costs. An expense-reduction plan saved $61 million during the quarter, and lower fiber costs kicked back another $130 million. Over the past three years, Kimberly-Clark has increased earnings per share by an average of 13% annually.

During the recession, management invested in core brands and streamlined operations. It's a familiar story, but few have implemented as effectively as Kimberly-Clark. Despite lower volumes, Kimberly-Clark forfeited just 4% of gross sales over the past year, a testament to the popularity of its products. Grace Barnett, a director at

Fitch Ratings

, expects the household-products industry to grow 5% in 2010, driven by consumers in emerging markets.

Of seventeen analysts surveyed by


, six recommend purchasing shares and the remainder advise holding them. The stock continues to record 52-week highs, repelling contrarian investors. The performance is warranted. Kimberly-Clark is cheaper and pays shareholders more than comparably sized peers. Its 3.6% dividend yield is higher than that of

Procter & Gamble

(PG) - Get Report



(CL) - Get Report

, which have equally recognizable brands and international exposure.

Kimberly-Clark trades at 15 times trailing earnings and 13 times projected earnings, a discount to its average household-products peer. The stock is also inexpensive when considering sales and cash flow per share. However, at 5.3 times book value, Kimberly-Clark isn't a pure value play. Still, return on equity, a key measure of profitability, consistently beats the industry average, justifying the premium. Third-quarter return on equity clocked in at 35%, trumping the industry average of 29% and the

S&P 500 Index

average of 3%.

Kimberly-Clark's stock has risen 3% annually, on average, over the past decade, more than the S&P 500. Its current dividend yield is above the 10-year average, presenting an attractive buying opportunity to income-oriented investors. Kimberly-Clark regularly increases its distributions and has a payout ratio, a measure of dividend safety, of 55%. Shares have rallied 25% this year, outpacing the Dow and S&P 500. Over the past month, Kimberly-Clark has risen 7%.

Analysts who are neutral about Kimberly-Clark cite its historical discount to household-products peers and rising raw-material costs. Crude oil and pulp are rebounding globally as investors seek safety in commodities. Nevertheless, third-quarter cost savings materialized and revenue growth, particularly in emerging markets and health care, surprised even the most bullish of analysts. Considering the Federal Reserve's lax interest-rate policy and expected dollar weakness, Kimberly-Clark is still an attractive investment.


American cell-phone penetration has topped 90%, and some experts question the long-term viability of landlines. But CenturyTel is still performing. Analysts expect fourth-quarter profit to rise a sequential 78%, though it will drop 14% from the year-earlier quarter. Of 19 analysts surveyed by Bloomberg, 14 recommend buying CenturyTel, four advise holding and one says to sell the shares.

Third-quarter net income surged 231% to $281 million as revenue soared 188% to $1.9 billion. CenturyTel, based in Monroe, La., completed its acquisition of


, a local exchange carrier, in July. The all-stock merger was dilutive to common shareholders, but strengthened CenturyTel's geographic reach and margins. In the latest quarter, its operating margin widened from 28% to 30%, beating integrated-telecommunications peers


(T) - Get Report



(VZ) - Get Report


CenturyTel doesn't offer the same margin of safety as Kimberly-Clark. The stock's 7.7% dividend yield is higher than that of benchmark averages as well as Verizon and AT&T. However, CenturyTel's 96% payout ratio indicates that a few off-quarters could cause a distribution cut. If the economy keeps improving, the company will, at least, come close to analysts' 2010 consensus earnings target. If CenturyTel is able to match expectations, its dividend not only will be safe, but also has room to grow.

Find ex-dividend dates, amounts, and yields -- by company -- with TheStreet's Dividend Calendar >>

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Still, there are risks. CenturyTel is suffering from rapid line losses, which is being compensated for by growth in high-speed Internet and television. The company's return on equity tagged 4% in the third quarter, trailing the telecommunications industry average, but beating the S&P 500. Return on assets was equally unimpressive at 2%. The Embarq acquisition is expected to produce significant cost savings.

CenturyTel trades at 13 times trailing earnings and 10 times projected earnings, significantly less than comparably sized peers. Its 1.1 book value multiple represents a 90% discount to the telecom-industry's average, a 49% discount to Verizon and a 31% discount to AT&T. CenturyTel is more expensive than its average peer on the basis of sales and cash flow per share. Over the past five years, the stock has returned 5% annually, on average, outperforming the S&P 500.

-- Reported by Jake Lynch in Boston.