Europe may slowly implode. That could cause problems for the financial sector, and the broader global economy. Even in the face of such developments, there are many blue-chip, dividend-paying stocks that are likely to provide excellent value over the long term, while providing a very high relative yield in the short term.

Undeniable Value

The dividend yield on the S&P 500 exceeds the yield on the 10-year Treasury note. This is extremely rare.

Until recently, it had been over 50 years since the dividend yield on the S&P 500 exceeded the 10-year Treasury note.  It happened in December 2008, when the dividend yield went to 3.3% and the Treasury yield dropped to 2.7%.

At that time, there were legitimate concerns that financial companies would cut dividends -- which they soon did.  That partly explained the high relative yield from dividends.  Nevertheless, the stock market is up 35.1% from December 2008 when this highly unusual relationship appeared.

The Situation Today

The current yield on the S&P 500 is 2.1%. That is above the current yield on the 10-year note of 1.9%.

This represents great value.

In fact, there are so many solid blue-chip companies paying dividends so far in excess of the yield available on government securities (or even corporate bonds) that it is hard to understand the rationale for bonds over selected stocks.

For example, Johnson & Johnson (shares of which your author owns) sports a dividend yield of 3.58%.

This is a company that still holds a AAA rating.  It increased profits in 2009, 2010, and each quarter so far in 2011, despite the recession in 2008 and subsequent weak U.S. growth.

The company has raised its dividend by a total of 24% over the past three years.  The dividend increase last year was 5.6%.  Its current dividend payout is 45% of profits.  There is room for continued dividend increases in line with likely earnings growth, which is estimated at 5% to 7% for the next several years.

If the company raises the dividend by 5% per year the next five years, that means the dividend yield on a current investment will rise to 4.6% (future dividend divided by current stock price).

The company also happens to generate approximately three-quarters of its revenue from overseas, where a great deal of its growth is generated.  The slow growth in the U.S. does not preclude solid revenue growth.

Given the company's strong balance sheet, steady profit and dividend growth, and overseas growth, the recent volatility in the stock is hard to explain rationally.

Should this stock really swing $1 or more on a daily basis based on the problems German banks face because of a possible Greek default?  Should the stock price drop sharply because of the risk of weakening global economic growth?

Our answer is a strong "no."  For the dividend alone, this stock has value, and anyone willing to ride out the swings in the stock price will continue to collect the 3.6% dividend, and almost certainly see dividend increases in the years ahead.  After all, the company has raised the dividend 49 straight years and it isn't about to stop now.

This is an investment which, in our opinion, is highly likely to outperform Treasury bonds over the next several years.  An investor who buys a 5-year note yielding just 0.8% and holds it until maturity will lock in that meager 0.8% annual return for five years.

Meanwhile, rising profits and dividends, despite Greece and Europe, are likely to support Johnson & Johnson stock over the same five-year period. And during that time, the 3.6% dividend yield will rise, and compound.

Other Stocks

Johnson and Johnson is by no means the only stock with this type of profile.

There are numerous high-quality stocks yielding 2% or more that have a long history of raising dividends.  Holding these stocks and cashing the dividend checks may well prove a sound long-term investment given current alternatives.  Granted, if the stock market takes off at some point in the next few years, these stocks will probably underperform the overall market.  We eagerly await that development.

A List

Below is a list of blue-chip stocks with current yields listed along with the number of consecutive years the company has raised its dividend.  These companies have strong balance sheets, relatively stable earnings trends, and are supported by international growth. (The list is presented for informational purposes and is not a list of recommendations.)

The high quality stocks noted above are not the only possible dividend plays. There are numerous stocks paying 2.5% dividend yields or higher.  This is evidenced by the fact that the 500 stocks in the S&P 500 provide a weighted average return of 2.1%, even while many companies still pay no dividend.

Upside Potential

Johnson and Johnson and the stocks listed above are also not the only stocks likely to raise dividends in the immediate years ahead.

Despite the incessant concerns about European problems and persistently weak U.S. growth, revenue growth for the S&P 500 has actually been strong recently.  Revenue was up 12% in the second quarter on a year-over-year basis.  Profits were up 12% (18% excluding Bank of America). The resulting stronger balance sheets have led to rising dividends

Dividends on the S&P 500 stocks increased 1.4% in 2010, according to Standard & Poor's, and are indicated to be up 17% in 2011.

Despite these increases, the payout ratio remains low.  In fact, as a percentage of profits, corporations are now paying out just 28% in dividends, according to data from Robert Shiller.  This is the lowest payout ratio on record in data from Mr. Shiller that dates back to 1871.

There is a lot of potential for dividend increases from companies not directly exposed to European financial problems.

What It All Means

This is an excellent time to invest in high-yield dividend stocks. It may take an iron stomach to sit through the volatility, but just as in December 2008, a long-term strategy is likely to pay off.

Selected dividend yields are particularly enticing given the extremely low rates on Treasury bonds. The Fed has indicated that rates will remain low for an extended period of time -- possibly years and years.  That means that current dividend yields from financially secure stocks are likely to outperform the interest rate returns from bonds.

Furthermore, dividend payout ratios overall are low.  Dividends have been increasing in recent years and there is room for further growth even in a low earnings growth environment.  Many companies raised dividends every year through the recent recession, and are likely to do so the next several years regardless of what happens in Greece.

High quality companies with a strong track record of raising dividends are a relatively appealing option for many investors with an intermediate to long-term viewpoint.

--Dick Green, Briefing.com