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Some investors see dividends as a sign of poor growth prospects, but in the long run dividends can help investors earn superior total returns.

In his 2005 book, "The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New," renowned market commentator Jeremy Siegel identified dividends as one of the key drivers of long-term equity outperformance. While companies that pay dividends may not grow as quickly as their successful nondividend counterparts, Siegel's research shows that the income they generate -- in addition to the signals that dividends send about financial strength, business stability and capital discipline -- have been extremely valuable for long-term investors.

"Pay me a dividend, and I know I'm getting something from my investment I never need to give back," said Josh Peters, a Morningstar equities strategist and the editor of the monthly Morningstar Dividend Investor. "Pay me a dividend, and I have the flexibility to help fund my lifestyle in retirement or reinvest my income for additional wealth compounding."

While Peters believes that the stock market has gotten a bit stretched, he sees opportunities for investors to earn returns in excess of the 2.3% yield being offered by the Standard & Poor's 500 Index ($INX).

The 26 money managers who make up Morningstar's Ultimate Stock Pickers tend to favor dividend-paying stocks. While it would be easy to look at just the highest-yielding stocks held by these managers, we found that most of those securities were actually held by fewer than two managers, and that some of the highest yielders on the list potentially lack the ability to sustain their dividend payouts.

So we narrowed the list to those securities held by at least five of our Ultimate Stock Pickers and which exceed the annual yield of the S&P 500.

We've also collected commentary from Morningstar analysts on the dividend-paying stocks they think are most appealing on a price-to-fair-value basis.

Ultimate Stock Pickers' top 10 dividend stocks
Company Price/fair value Dividend yield # of funds holding (of 26)
Eli Lilly (LLY) 0.83 5.61% 6
Bristol-Myers Squibb (BMY) 0.95 5.11% 6
Pfizer (PFE) 0.67 4.36% 10
Philip Morris International (PM) 1.03 4.52% 7
Merck (MRK) 0.78 4.44% 6
Diageo's (DEO) 0.99 3.02% 7
Kraft Foods (KFT) 0.93 3.70% 7
Abbott Laboratories (ABT) 0.70 3.75% 7
Sysco (SYY) 0.82 3.42% 6
Johnson & Johnson (JNJ) 0.80 3.45% 13

Four of the 10 names -- Pfizer, Philip Morris International, Diageo and Sysco -- are holdovers from last year's list of top 10 dividend stocks. That's not surprising, given their long-standing status as dividend payers.

Philip Morris and Diageo are "sin stocks," or stocks of companies that derive a significant portion of their revenue from socially questionable products -- in this case, cigarettes (Philip Morris) and alcohol (Diageo). Such companies traditionally pay higher dividends to attract and retain investors.

The list is also heavily weighted toward companies in the health-care and consumer sectors. We think the health-care orientation is the result of pharmaceutical companies being pressured by a raft of drug patent expirations. That said, just about every health care name on the list is yielding above 4%, a much higher figure than we would expect from this traditionally defensive sector.

As for the consumer names that aren't sin-related, the yields are slightly elevated due to the impact that the downturn in the economy has had on business models.

Lilly's uphill climb

Morningstar analyst Damien Conover believes that Eli Lilly faces one of the most daunting 10-year outlooks in its peer group, which goes a long way toward explaining its high yield.

Conover said that flat top-line growth over the next decade (due to the loss of several high-margin drugs) is likely to pressure Lilly's earnings. Even so, the analyst thinks Lilly offers a compelling valuation on the basis of his cash flow projections (which should support the dividend) and the potential for upside from the company's pipeline.

Lilly's drug solanezumab could shift the paradigm in treating Alzheimer's. Positive data from the drug's Phase III trials (expected in 2012) could dramatically reshape Lilly's prospects, said Conover, who expects Lilly to advance several Phase II candidates into Phase III development rapidly to help mitigate the effect of patent expirations.

With several of Lilly's earlier-stage drugs targeting cancer -- a therapeutic area that holds the potential for rapid development and quick regulatory approval -- there is potential for Lilly's outlook to improve significantly, Conover said.

Pfizer's 'compelling' valuation

Pfizer also faces patent expirations, which helps explain the stock's 4%-plus dividend yield. With more than a third of the New York company's sales coming from products losing patent protection over the next four years, analyst Conover believes that the company faces a negative growth rate through 2012.

Yet Conover thinks that despite the threats to Pfizer's growth prospects, its valuation is compelling, based on such factors as the company's expansion into emerging markets, a development that he said may not be fully appreciated by investors.

With emerging markets demanding health care products at an accelerating pace, sales of Pfizer's blockbuster drugs could dramatically increase over the next five to 10 years, Conover said.

Further, fear of counterfeit generic drugs is creating longer exclusivity periods and shelf lives for branded drugs in emerging markets, offsetting the general disregard for patent protections in those markets.

Considering the cheaper marketing costs and the sunk costs of development, the incremental returns on investment from this geographical expansion should be stellar, according to Conover, who notes that cost-cutting efforts associated with the Wyeth merger could exceed expectations and give Pfizer the opportunity to generate more profit for each dollar of sales, as well as increase its dividend payout ratio.

Strong tail winds for Abbott Laboratories

Unlike many of its peers, Abbott faces only a few patent losses over the next five years. Analyst Conover thinks the Abbott Park, Ill., company is well-positioned to ride a strong tail wind of demand for its products.

Abbott is making moves to capitalize on decisions by many drug companies to leave the market for primary-care treatments for such maladies as cardiovascular disease, Conover said, and the company could assume market leadership in the field of heart disease.

Abbott has been adept at finding niche markets to exploit, the analyst said, and it continues to enjoy strong demand for its leading drug, Humira, used in the treatment of rheumatoid arthritis, psoriasis and Crohn's disease. Humira sales could grow at a double-digit pace over the next four years, Conover said.

Abbott also has a strong competitive position in nutritionals and diagnostics, markets that help reduce earnings volatility and create additional avenues of growth.

Abbott should still be able to continue raising its dividend at a double-digit annual rate over the next several years, Conover said.

Sysco sets the table

Sysco's share price has taken a hit as cost-conscious consumers eat more meals at home instead of dining out at restaurants, which are supplied by the company. Morningstar analyst Erin Swanson thinks investors may be missing management's successes at raising sales-force productivity, expanding the distribution platform and improving supply chain efficiency.

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Not only will these gains drive growth, Swanson said, but they should also prevent the Houston company's competitive position from eroding.

There is plenty of potential for Sysco to expand its market share, the analyst said, despite what is already a fairly dominant market position (a 17% share of the highly fragmented North American market).

The company should be able to expand its presence by targeting underpenetrated segments (like larger chain restaurants) and by helping marketing associates expand existing business segments such as travel and leisure, Swanson said.

Management's focus on driving additional share gains, as well as its commitment to returning excess cash to shareholders in the form of dividends and share repurchases, makes Sysco a worthwhile investment alternative for income and growth investors, Swanson said.