BOSTON (MarketWatch) — You’d be hard-pressed to miss the near daily proclamations from gurus and others urging investors to focus on dividend-paying stocks. But not just any dividend-paying stocks.

It has to be dividend-paying companies with some sort of unique twist — those that have increased their dividends for 25 straight years, or those that have a high current yield and a long track record of strong dividend growth, or those that make good use of free cash flow, be it on dividends or not.

This week, Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research Services, said investors should pay closer attention to “defensive sectors during the traditionally weak May through October period” and that those who like “owning companies that have consistently increased their cash payouts” should consider the SPDR S&P Dividend ETF SDY, +0.64% .

That ETF, he noted in his weekly commentary, seeks to mimic the composition and performance of the S&P High Yield Aristocrats, which since year-end 1999 has posted a cumulative total return of 164%, besting the S&P 500’s 12% advance.

The S&P High Yield Aristocrats comprises 60 of the highest dividend-yielding companies in the S&P 1500 composite that have a record of increasing dividends over 25 years. At the end of last week, the top 10 holdings were CenturyLink Inc. CTL, ; Pitney Bowes Inc. PBI, -2.21% ; Leggett & Platt LEG, +1.10% ; Consolidated Edison Inc. ED, +1.06% ; HCP Inc. HCP ; Abbott Laboratories ABT, +3.46% ; Kimberly-Clark KMB, +0.90% ; National Retail Properties Inc. NNN, -0.54% ; Cincinnati Financial Corp. CINF, +0.10% ; and Johnson & Johnson JNJ, +1.23% . Learn more about the index at this website.

For their part, the managers of T. Rowe Price’s Dividend Growth fund PRDGX, +0.78% say investors should focus both on current dividend yield and a track record of strong dividend growth.

“By taking both factors into account, investors stand to benefit from future dividend increases while avoiding paying too much for growth opportunities,” the company said in its take on dividend-paying stocks. Its top holdings as of the end of the first quarter included Pfizer Inc. PFE, +1.46% ; Exxon Mobil Corp. XOM, +0.14% ; Chevron Corp. CVX, +0.13% ; Wells Fargo Company WFC, +1.07% ; and Schlumberger Ltd. SLB, -0.25% .

Don’t focus solely on dividends

Marc Pinto, manager of the Janus Growth & Income fund JNGIX, +0.15% and co-manager of the Janus Balanced fund JANBX, -0.15% , reminded investors to exercise caution when chasing yield, “as dividends alone do not determine the most attractive long-term investments.”

Not all dividends are created equal, Pinto wrote in a white paper. He said the most attractive large-cap growth opportunities reside with companies — increasingly tech companies — that strike the right balance between dividend distributions, business reinvestment and other productive uses of excess cash flow.

According to Pinto’s white paper, “Growth Stocks and Dividends — A Winning Combination,” a company can generally use excess cash flow in five ways: business reinvestment, mergers and acquisition activity, debt reduction, stock buybacks, and dividend distributions.

There’s been a growing realization that a “prudent, strategic mix of these capital deployment opportunities may produce the most beneficial shareholder value,” he said.

Of course, determining the most suitable combination of those five ways to use excess cash flow requires an understanding of potential return on investment in each area. That can vary depending on specific firm cash flows and growth cycles. But certain companies do a better job of that than others, Pinto said. Read the Janus white paper at this website.

“Companies are generating so much cash, they have the ability to do both. They have the ability to invest in their business, to make acquisitions, potentially, and still have enough cash left over for shareholders in the form of dividends and share repurchasing,” Pinto said in an interview. “Companies can have their cake and eat it too.”

Pinto said equity investors should consider the following two points when evaluating a growth company’s use of excess cash flow. One, free cash flow — that is, cash flow available for payments of dividend to shareholders — as a percentage of revenue. In June 2010, for instance, free cash flow as a percentage of revenues for S&P 500 companies was a tad more than 11%, nearly double the average of 6.5% from June 1998 to June 2010. That suggests companies’ businesses are generally healthy and have the ability to increase dividend payments. “Companies are getting more efficient,” said Pinto.

And, two, equity investors should look at free-cash-flow yield; that is, free cash flow relative to market capitalization. “Free-cash-flow yield tells you how much cash per share the company is generating, and that gives you a sense of what the options are,” said Pinto. If you have a company where the free-cash-flow yield is 8% of their market cap, that tells you that they could support a dividend yield of 3% and still have 5% to reinvest in acquisition or share repurchase, or whatever, he said.

Two companies that represent that ideal blend of growth and income, both of which are in the top 10 holdings of the funds managed by Pinto, are Philip Morris International Inc. PM, +0.87% and U.S. chemicals company E.I. DuPont de Nemours & Co. DD, +0.52% .

According to Pinto, tobacco is a high margin, but low-growth business. “Phillip Morris generates a lot of cash and has some opportunity to invest that cash in new markets, but generally returns the majority of that cash to shareholders in the form of dividends and repurchase,” said Pinto. Phillip Morris is a growth company — earnings are growing at around 10% per year — but the company is also returning a substantial amount of cash to shareholders, Pinto said. The current dividend yield is 3.74%.

DuPont is another of Pinto’s top holdings that represents that blend of growth and dividends. The company has paid a dividend throughout its history, even during the economic downturn, and its nutrition and agriculture segments are growing. (DuPont is the leading seller of genetically modified seed.) Its dividend yield is 3.14%.

According to Pinto, DuPont has a good business model and the intent of its management — the company has a new chief executive — is sound. Said Pinto: “It has cash to grow.”