McDonald’s (MCD) became a dividend play for a lifetime a few months ago highlighted by Jim Royal in his regular posts at Motley Fool.

He is back today to recommend another dividend play for a lifetime. The company is Microsoft (MSFT). Microsoft has been an exceptional dividend star over the past few years. It has fattened its dividend on average by 15% over the past five years — a clean double in that half-decade. That’s a solid gain, but it looks like Microsoft has plenty more increases in store. While its yield stands at 2.6%, well above that of the average S&P stock, it’s not the stuff of legend. But as an income investor, you need to balance high yield with high dividend growth. The growth rate is as vital as the dividend.

Another dividend paying companies which meet criteria to be selected and added to a dividend portfolio:

Source: Capital IQ, a division of Standard & Poor’s.
Frontier dividend reflects recent change down to a $0.75 annual dividend rate.

Microsoft and Johnson & Johnson both offer lower yields, but with their excellent consumer franchises (despite J&J’s current problems) they have greater potential for high year-after-year increases.

Annaly has been pumping out mighty dividends over the last couple of years. As interest rates plummeted, Annaly’s net interest margin fattened, as did its payouts. Annaly could be a great play as long as low inflation remains, but the company is monitoring interest rates closely. If and when rates increase — more likely, skyrocket — the company could see a disruption in those payouts.

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One of the most common issues that dividend investors face is the holding period for their dividend stocks. It seems that dividend investors are divided in two camps on the issue. One of the camps believes in active allocation of capital, where positions are continually adjusted depending on company performance, market performance or relative portfolio weights, to name a few reasons. In an era where it is possible to buy and sell dividend stocks within nanoseconds, holding on for more than a few years seems like eternity to some. The other camp is focused on the long-term holding of dividend stocks. The second camp believes in buy and hold investing, an arcane strategy, which is termed obsolete during bear markets, but is widely praised during bull markets. So what should the holding period of an enterprising dividend investor be?

In most cases, it takes time for a position to work in your favor. This is particularly true for dividend growth stocks, where low current yields coupled with strong dividend growth result in substantial yields on cost after several years of patience. Investors who focus on stocks like Procter & Gamble (PG: 62.17, 0.31), McDonald’s (MCD: 75.65, -0.45) or Johnson & Johnson (JNJ: 63.29, 0.06) despite their current yields, could generate sufficient dividend income streams over time.
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Many investors ignore dividend investing, because they associate them with boring unexciting investments which are destined to fall into oblivion.

Some investors believe that rather than wait for a whole year to collect a 3%-4% dividend, you could make 3-4 % per day in the market trading volatile technology stocks. The fact of the matter is that few if any investors could accurately forecast stock market moves in order to profit from large daily swings in some of the most volatile stocks in the market today. Dividend payments on the other hand are much less volatile than stock prices, which is what makes them ideal for investors who plan to live off their investments. The stability of the payments makes them a reliable source of income in virtually any market, without having to sell a portion of one’s portfolios and exposing yourself to market fluctuations.
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Dividend-paying stocks are appealing because they have a track record of beating the broader stock market. Focusing on the most undervalued names of the S&P’s so-called dividend aristocrats means investing in the most undervalued companies.
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