Quarterly Investment Guide

These stocks do best in rocky markets

Constance Gustke, special to CNBC.com

Rising interest rates and may roil some stocks, but they barely put a dent in ones with steadily rising dividends.

Buoyed by growing earnings, these high-quality stocks perform well in different economic scenarios, say experts. The benchmark S&P 500 Dividend Aristocrats Index, for example, has pumped out 9.91 percent annual returns for the past 10 years versus only 6.93 percent for the S&P 500.

Experts believe that these cash-rich companies will do even better this year. Swooning markets have indeed hit the Dividend Aristocrats Index too. But that index has had a 4.2 percent loss so far this year versus a steeper one of 4.9 percent for the S&P 500.

Though the Dividend Aristocrats Index doesn't match other high-growth stocks during go-go years, it does excel over time. The Index, which holds 51 stocks that have raised their dividends each year for the past 25 years, had a whopping 342 percent total return over 10 years versus just 92 percent for the S&P 500 Index.

"The Dividend Aristocrats index beat the market three out of four times during rate tightening and during mega meltdowns, said Sam Stovall, US equity strategist at S&P Capital IQ. "If the stock market is the amusement park, dividend stocks are the merry-go-round."

Stocks with rising dividends, he adds, perform well because they're good-quality companies. They're less volatile than other stocks. "So if you lose less on the way down, there's less ground to recover," explained Stovall.

To worry or not to worry

Dividend-growth stocks look good this year, too. S&P 500 companies had $1.3 trillion in cash and equivalents stashed on their balance sheets as of last June. That cash is increasingly used to reward shareholders with dividends, and it shows no signs of slowing. In third-quarter 2015, dividend cash payouts per share were 46.47 percent versus 29 percent in the same quarter in 2010.

So Stovall recommends looking at companies with rising dividends, increasing earnings and good market share.

The investment management firm Eaton Vance (EV) has a buy rating from S&P Capital IQ. Assets under management have grown steadily since the last market meltdown and totaled $311.4 billion as of late October. The dividend yield is 3.3 percent. Lincoln Electric Holdings (LECO), which makes robotic welding packages and other products, also has a buy rating. Its earnings, which have steadily grown for several years, help fuel the 2.5 percent yield.

Interest rate hike: What you need to know

Tried-and-true Johnson & Johnson (JNJ) also keeps churning out consistently growing earnings. And it has "solid positions in drugs, medical devices and consumer products," according to a S&P IQ research report. It's also a member of the Dividend Aristocrats Index, which also includes Medtronic, Kimberly-Clark, Pepsico and many other companies.

Combing through this index can turn up some good stock buys, say experts.

"Investors get confused by just looking at current yield," said Charles Farrell, CEO of Northstar Investment Advisors in Denver. "But income streams become less valuable unless they grow."

Dow dividend plays
Active vs. passive: Finding the best fund management fit

Dividend-paying companies can usually ride out different economic cycles, too. However, stock buybacks are more tied to the economy. In 2009, dividend payments fell 10 percent, but buyback spending plummeted 61 percent, according to S&P Capital IQ studies. "Dividends are real cash," said Farrell. "But buybacks are much less clear."

Josh Peters, editor of the "Morningstar Dividend Investor" newsletter, prefers to look for out-of-favor dividend stock plays. The consumer goods company Procter and Gamble (PG), also included in the Dividend Aristocrats Index, is one of Peters' picks.

"Wall Street has gotten impatient with its turnaround," he explained. "So you'll get better valuations," he said. The stock, which yields 3.3 percent, will see its growth pick up in 2017, he added.

The utility Duke Energy (DUK) is also big and unloved, Peters said. "But I can't find anything to complain about. Management has done a good job." It also yields 4.6 percent, and Peters expects the utility to raise its dividend 4 percent a year for the next five years.

Sandy Pomeroy, portfolio manager of the Neuberger Berman Equity Income (NBHAX) fund, sees more companies rewarding their shareholders with dividends in 2016. "Payout ratios are still low," she said, "so there's room to grow dividends." Her fund, which has $2 billion in assets, looks for companies with dividends that grow 5 percent to 7 percent annually and are cheap.

One fund holding Eli Lilly (LLY) will start raising its dividend again, she said. The pharmaceutical company has a number of new drugs set to launch, and they will help Lilly grow earnings substantially, she said, adding, "You can own Lilly forever." The yield, currently 2.4 percent, will keep growing 5 percent to 7 percent annually, according to her.

The Florida utility NextEra Energy (NEE) is another fund holding. Though utilities have performed poorly, she added, NextEra has a large renewable business in wind and solar. It will also increase its dividend, currently 2.9 percent, at a steady clip. "We're not trying to shoot out the lights," she said, "but provide high current income and capital appreciation."

For S&P IQ's Stovall, slow and steady wins the race: "When doing dividend investing, boring can be beautiful," he said.

— By Constance Gustke, special to CNBC.com