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Defensive investors regularly seek high quality dividend stocks to achieve sustainable returns even in bear markets. The S&P 500 Dividend Aristocrats Index, which tracks 42 blue-chip S&P 500 companies that have increased their dividends at least 25 consecutive years, is one alternative for many dividend investors.

On the other, David Fish’s U.S. Dividend Champions list has also become very appealing to some dividend investors that look for a starting point in their research. Dave Fish compiles a complete list of all US stocks that have increased their dividend payout for at least 25 consecutive years. In addition, the author presents two separate sub-lists as nominees for future Dividend Champions: “Dividend Contenders” that have increased their payouts for 10-24 years and “Dividend Challengers” that have increased their payouts for 5-9 years. The whole list can be found here.

We are concerned about Fed’s monetary policy and we believe investors should pick defensive stocks seeking inflation protection. We think the Dividend Challengers in the S&P 500 that are able to increase dividends are attractive options for defensive investors that demand sustainability, better risk-return combination and some inflation protection.

Below, we provided a list of 31 stocks from the Dave Fish’s Dividend Challengers in the S&P 500 and showed how they have performed this year:

Dividend Yield

Dividend Payout Ratio 2010

YTD Return

Centerpoint Energy Inc.

CNP

4.04%

80%

26.55%

Dominion Resources Inc.

D

3.95%

57%

15.64%

Microchip Technology

MCHP

3.68%

59%

-2.92%

Lockheed Martin

LMT

3.60%

40%

16.21%

Heinz, H.J. Co.

HNZ

3.43%

59%

10.40%

Campbell Soup Co.

CPB

3.35%

46%

1.26%

Edison International

EIX

3.32%

37%

2.32%

General Mills Inc.

GIS

3.04%

45%

6.59%

Intel Corp.

INTC

2.96%

33%

8.51%

Kellogg Co.

K

2.94%

49%

10.41%

Darden Restaurants Inc.

DRI

2.66%

41%

15.60%

Hasbro Inc.

HAS

2.44%

40%

-7.21%

Analog Devices Inc.

ADI

2.36%

38%

-1.80%

Harris Corp.

HRS

2.33%

22%

-4.04%

Microsoft Corp.

MSFT

2.29%

29%

-3.74%

The Gap Inc.

GPS

2.28%

23%

-13.95%

L-3 Communications

LLL

2.02%

21%

20.73%

Best Buy Co Inc.

BBY

1.93%

17%

-8.27%

Assurant Inc.

AIZ

1.88%

13%

-8.20%

ITT Corporation

ITT

1.73%

23%

10.84%

Deere & Co.

DE

1.69%

30%

-0.81%

International Flavors & Fragrances

IFF

1.68%

32%

15.44%

Kroger Co.

KR

1.64%

23%

13.40%

Airgas Inc.

ARG

1.56%

32%

11.50%

CSX Corp.

CSX

1.43%

28%

20.37%

Ameriprise Financial Inc.

AMP

1.40%

17%

-2.62%

CVS Caremark Corp.

CVS

1.24%

17%

8.26%

Costco Wholesale Corp.

COST

1.06%

29%

12.41%

Cummins Inc.

CMI

1.01%

20%

-5.63%

AmerisourceBergen Corp

ABC

0.93%

18%

24.61%

FedEx Corp.

FDX

0.52%

10%

1.44%

AVERAGE

2.27%

33%

6.24%

SPY

4.45%

Since the beginning of this year, the average YTD return of these 31 stocks was 6.24% vs. 4.45% for the SPY. All these stocks except CNP have dividend payout ratio of less than 75%. The average dividend pay-out ratio of those stocks is 33% and the average dividend yield is 2.27%.

Here are the 10 highest dividend yielding stocks in our list:

Centerpoint Energy Inc.: Centerpoint Energy Inc. is a utilities company distributing electricity and natural gas in the United States. CNP has a 4.04% dividend yield and returned 26.55% since the beginning of this year. The stock has a market cap of $8.21B and a P/E ratio of 17.07. Jim Simons’ Renaissance Technologies has the largest CNP holding among 300-plus funds we are tracking. (See Jim Simons’ favorite stocks)

Dominion Resources Inc.: Dominion Resources Inc. is a U.S. utilities company supplying electricity and natural gas to North Carolina, and Virginia. D has a 3.95% dividend yield and returned 15.64% since the beginning of this year. The stock has a market cap of $27.70B and a P/E ratio of 9.08. Steven Cohen and Clint Carlson are prominent D investors.

Microchip Technology: Microchip Technology is a US tech company providing microcontroller, semiconductor and memory products. MCHP has a 3.68% dividend yield but lost 2.92% since the beginning of this year. The stock has a market cap of $7.14B and a P/E ratio of 17.04. Robert Rodriguez, Jim Simons, Ken Griffin and Ray Dalio are among MCHP investors.

Lockheed Martin: Lockheed Martin is an American corporation operating in aerospace, defense, security and advanced technology industries worldwide. LMT has a 3.60% dividend yield and gained 16.21% since the beginning of this year. The stock has a market cap of $27.78B and a P/E ratio of 10.91. Both Jean-Marie Eveillard's First Eagle and John Shapiro's Chieftain Capital had more than $200 Million in LMT at the end of March 2011. (See Jean-Marie Eveillard’s top stock picks)

Heinz, H.J. Co.: Heinz, H.J. Co is a US company providing food products worldwide. HNZ has a 3.43% dividend yield and returned 10.40% since the beginning of this year. The stock has a market cap of $17.15B and a P/E ratio of 17.42. Nelson Peltz’s Trian Partners holds nearly $100 Million of HNZ.

Campbell Soup Co.: Campbell Soup Co. is a US company that produces and sells canned soups and related products worldwide. CPB has a 3.35% dividend yield and gained 1.26% since the beginning of this year. The stock has a market cap of $10.96B and a P/E ratio of 14.05. Mason Hawkins’ Southeastern Asset Management holds more than $600M of CPB.

Edison International: Edison International is a US utilities company that generates and distributes electricity mainly in California. EIX has a 3.32% dividend yield and returned 2.32% since the beginning of this year. The stock has a market cap of $12.52B and a P/E ratio of 10.25. Steven Cohen holds nearly $60M of EIX. (Check out Steven Cohen’s top stocks)

General Mills Inc.: General Mills Inc. is a US company that manufactures and sells branded food products worldwide. GIS has a 3.04% dividend yield and returned 6.59% since the beginning of this year. The stock has a market cap of $23.89B and a P/E ratio of 13.77. Ric Dillon holds more than $140 Million in GIS at the end of March 2011.

Intel Corp.: Intel Corp. is a global technology company that manufactures and supplies microprocessor products worldwide. INTC has a 2.96% dividend yield and gained 8.51% since the beginning of this year. The stock has a market cap of $119.03B and a P/E ratio of 10.30. Ken Fisher and Harris Associates have the largest INTC positions among 300+ funds we are tracking.

Kellogg Co.: Kellogg Co. is a large provider of convenience foods and cereals. K has a 2.94% dividend yield and gained 10.41% since the beginning of this year. The stock has a market cap of $20.17B and a P/E ratio of 17.37. Phill Gross’ Adage Capital holds the largest K position among the 300-plus funds we are tracking. (Check out Phill Gross’ other top holdings)

Source: Investing in S&P 500 Dividend Challengers: Part 1