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Dividend 15 Stocks: A Mixed Bag

Our picks trailed the S&P 500 index as the market's love went to companies with the fastest earnings growth.

When we launched the Kiplinger Dividend 15 in the December 2017 issue, we didn't expect our favorite dividend-paying stocks to be big winners in this market. Stocks made our roster primarily for their dividend stability, income growth or above-average yield. And it's the shares of companies with brisk earnings growth that have fueled much of the rally, leaving stocks with slower growth and higher dividends behind. Overall, the Kip 15 returned an average of 7.4% since October 1, 2017, trailing the 9.3% return of Standard & Poor's 500-stock index (prices and returns are through February 16).

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Several of our picks still delivered superior returns. Walmart (WMT) climbed 34.8% as investors bet that the retailer, which has invested heavily in online sales, could successfully fend off Amazon.com. Shares of Home Depot (HD) rose 14.9%, fueled by ongoing strength in the housing market. Texas Instruments (TXN), up 18%, prospered from strong demand for its computer chips in the industrial and automotive markets.

A few of our stocks didn't perform nearly as well. ExxonMobil (XOM) missed analysts' estimates for fourth-quarter earnings, contributing to a 4.8% decline in the stock. CVS Health (CVS) retreated 10.5% as investors worried about Amazon getting into the pharmacy business and the impact of CVS's subsequent $69 billion bid for health insurer Aetna. Procter & Gamble (PG) slipped 7.8% after issuing a sluggish sales and profit forecast. None of these hurdles should impact the firms' dividends, however, and the stocks should fare well over the long term.

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We're also sticking with Realty Income (O), a real estate investment trust that has slumped by 11.3%, including dividends. REITs have come under pressure as interest rates have climbed. Higher rates make the stocks less competitive with long-term bonds, and also raise financing costs for REITs, which tend to issue a lot of debt to buy and fix up properties.

Realty owns more than 5,000 retail properties that it leases to big companies such as Walgreens, FedEx and Dollar General. Some of these retailers may not open as many stores as in the past as shoppers buy more goods online. And Realty has been adding movie theaters to its property lineup—a worrisome trend as theater chains struggle with lackluster attendance.

Yet Realty's business isn't showing any signs of stress. Most of its tenants sign long-term leases, and more than 98% of its properties remained leased at the end of 2017. Revenues rose 10.2% in 2017, compared with a year earlier, and profits rose 6.3% (based on funds from operations, a measure of earnings that represents net income plus depreciation expenses). Analysts expect Realty's FFO to hit $3.17 per share in 2018, up from $3.06 in 2017.

Realty's dividend, meanwhile, should continue like clockwork. The firm doles out dividends monthly and hasn't missed a payment in 572 months—or nearly 50 years. Realty has a long history of raising its dividend, too, and hiked it by 5.7% in the third quarter of 2017. We don't expect big things from the stock, which could slump more if interest rates continue to climb. But the shares now yield a generous 5.3%. With Realty's dividends secured by long-term leases from large, stable tenants, investors should get paid for years to come.

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