BOSTON (TheStreet) -- Investors are preparing their portfolios for a stock-market rally as the benchmark S&P 500 Index has jumped 13% since the end of August.

By contrast, Pamela Rosenau, principal and chief investment officer of Rosenau/Paul Group, is sitting tight.

Rosenau/Paul Group, which manages $700 million in assets, prefers steady dividend payers such as Chevron ( CVX - Get Report) and Vodafone ( VOD), which help to smooth out stock-market fluctuations, she says. Rosenau also is managing director of HighTower Advisors.

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The S&P 500 closed at the highest level since early May on expectations the Federal Reserve will pump up the economy with bond purchases, also known as quantitative easing, and reports that showed the strongest signs yet that the economy is rebounding.

Still, economic growth is anything but certain as economists predict the jobless rate will average more than 9% through next year. The S&P 500 has fallen 100 points within a one-month period twice this year, and one other time it tumbled 200 points over two months. Before rebounding in September, the index dropped as much as 75 points the previous month.
Pamela Rosenau
Pamela Rosenau, chief investment officer of Rosenau/Paul Group

Rosenau says she has an audited track record dating to 2000 that has handily beaten the stock market with a fraction of the volatility. Dividend stocks and master limited partnerships (MLPs) have buoyed her firm's portfolios in the past decade, when the S&P 500 has fallen in four calendar years.

MLPs have high yields, liquidity and investment-grade debt. Large-cap companies can pay growing dividend yields that are outpacing some corporate bond yields, she says. Many large-cap stocks are trading at values that are well below where they were a decade ago. As a result, that asset class is attractive for the next 10 years, she says.

When stocks are on the rise as they are now, playing defense may result in returns that trail the broader equity market. But Rosenau says proper asset allocation is key to surviving the ups and downs.

"The first mandate is to not lose money," Rosenau says. "In the really up years, I'll lag. But in the bad years, I'll outperform. Anyone playing defense will lag. I'll still have a positive return."

A cornerstone of Rosenau's strategy is based on the idea that any asset class will revert to the mean due to extreme sentiment. That idea extends to payout ratios, or the amount of earnings paid out to shareholders in the form of dividends.

Payout ratios are currently below 30%, the lowest in 80 years. Rosenau notes that the average payout ratio is roughly 55%, and she expects that the market will overshoot that mean before it returns to normalcy.

If that occurs, dividend yields, which normally average 4%, would likely jump from 2% to nearly 5%. "It's all about payout ratios. That's the growth metric," Rosenau says. "The most important safety metric is dividend coverage."

Read on for Rosenau's high-yielding stock picks, which she calls her "dividend darlings."

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Vodafone ( VOD)

Company Profile: Vodafone is a global wireless company. Verizon Wireless, the largest wireless provider in the U.S., is a joint venture of Vodafone and Verizon ( VZ).

Share Price: $26.24

Dividend Yield: 6.6%

Rosenau's Take: "The stated growth of the dividend was 7% per year, which is very exciting. Even if the stock does nothing, it's very exciting. The kicker is the Verizon Wireless interest, which they are getting no credit for, in terms of valuation. They own 45% and Verizon owns the balance. At the end of 2011, the wireless business will have no debt. That is when Verizon has to do something to start distributing the cash flow."

"We don't know how it will go because there are various permutations. There will be a realization of value in some way, whether it's more income, more cash flow or higher valuation. Anywhere between now and the end of next year, you're going to get some extra value or yield, and you're collecting close to 7% on the dividend."

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Chevron ( CVX - Get Report)

Company Profile: Chevron is an oil and gas company with upstream operations in exploration and products, and downstream operations in refining, marketing and transportation.

Share Price: $85.03

Dividend Yield: 3.4%

Rosenau's Take: "It seems like a no-brainer. Commodities have gone up, and oil has lagged. The stocks always start to outperform or underperform the commodity. It has undisputedly one of the best long-term production profiles in the integrated oil space. Yet, it has traded at a persistent discount to Exxon Mobil ( XOM)."

"A few years back, you could have made a case for that because their refining business was a turkey. Every quarter there would be some excuse for why they didn't make their numbers. They don't have any refining left and they have a lot more consistency in their earnings, which is why it's a misperceived company. They have an above-average growth profile with a much more attractive valuation. On an enterprise value basis, they're at a 15% discount to the other integrated companies."

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CenterPoint Energy ( CNP - Get Report)

Company Profile: CenterPoint Energy is a public utility holding company, which operates in electric transmission and distribution facilities, natural gas distribution facilities, interstate pipelines and natural gas gathering, processing and treating facilities.

Share Price: $16.44

Dividend Yield: 4.8%

Rosenau's Take: "If we are tentatively in a more deflationary environment, utilities have pricing power. You want to be where companies have pricing power. Utilities haven't done anything in such a long time, so expectations are so low but dividend yields are high. About 80% of the business is regulated, which is a good thing in an uncertain environment. Dividend growth, which is what you always want, is projected to be about 4% or 5%."

"The freebie is that they have the ingredients to create an MLP to attract more value. They have pipelines and natural-gas gathering and processing. They're in the Haynesville region in Louisiana and Texas. Certainly, they could easily create value for shareholders by spinning this out. MLPs are getting huge enterprise valuations. I like it because you're getting a stable business that is growing, you're getting a yield of 5%, and you're getting total return of nearly 10%."

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ONEOK ( OKE - Get Report)

Company Profile: ONEOK is a natural-gas distributor in the U.S. and is the sole general partner of ONEOK Partners ( OKS).

Share Price: $50.38

Dividend Yield: 3.7%

Rosenau's Take: "This one is a little more evolved. They've spun off their MLP, ONEOK Partners. This is the utility, but instead of 80% of the business being regulated, about 60% is. The other 40% is comprised of the cash flows that they're getting from the MLP and general partnership in the MLP. The yield on the MLP is 5.6% right now."

"The real juice is the general partner interests. You get a flow of income and you're not doing anything to get it. They share 50/50 with the public in the general partnership. For every dollar in growth and distributions that the MLP generates, they get 50 cents of that without doing anything. This is a very valuable annuity. It's cheap in this case because the general partnership is cheap, as it sells for seven times cash flow."

"Plus, they just announced that they're going to grow their dividend by 50% to 60% over the next three years. That's an annual rate of 15% to 20%. Twelve months from now we could be at 4.5%."

-- Written by Robert Holmes in Boston.

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