Income or growth? That’s the false choice the big firms that dominate Wall Street present their investors all too often.

If you’re retired or at least close to hanging up your spurs, they want to shoehorn you into annuities, bonds and other fixed income, on the grounds that you need income and can’t afford to lose money. If you’re in your prime earning years, it’s blue chips and other “growth stocks,” with little or no mention of dividends.

Unfortunately, either is a formula for mediocre returns at best. Not only can you have growth and income at the same time. But one is the surest road to the other.

The key is dividend-paying equities. That’s common stocks, master limited partnerships, real estate investment trusts, Canadian trusts and other investments that represent ownership in companies. You share in the growth of companies and receive cash dividends while you own them.

Pick up a “getting started” brochure from almost any investment house and you’ll see a line about how stocks are riskier than bonds. That’s certainly true if a company goes into chapter 11 bankruptcy. Mainly, bondholders get paid off first, while stockholders are last in line and in most cases get nothing.

On the other hand, unless you’re an exceptionally bad stock picker, you’re probably not going to wind up with that many companies in bankruptcy. And when a stock’s fortunes turn south, its bonds lose value right along with its common stock. That’s why my simple rule is never to buy or hold a bond issued by any company that I wouldn’t want to own the common stock of.

Ironically, in early 2010, bonds are arguably more dangerous than dividend-paying stocks. That’s because recession-fearing investors have loaded up on bonds in record amounts on the idea that they’re somehow safer. As a result, yields are at their lowest point in decades, despite lingering credit risks from the recession and the growing risk of higher interest rates as the economy gets back on its feet.

In contrast, dividend paying stocks are still going begging. Even stocks of companies with consistent histories of raising their payouts are yielding in many cases 2 to 3 percentage points more than those same companies’ bonds.

In short, they’re pricing in credit risks that are rapidly diminishing, even as bonds are pricing in virtually no risk at all. Sooner or later, that gap is going to close and either way investors are going to be far better off in dividend paying stocks.

One other key point: Strong companies are using today’s low interest rates to issue low-cost bonds in record amounts. That new money is being used to redeem higher interest rate bonds, cutting costs and strengthening balance sheets. Some are using the money to finance expansion and acquisitions that will boost earnings going forward. As a result, dividends are both better protected than ever before and are poised for growth as well—two more very strong reasons to buy dividend-paying stocks.

Strategic Yields

Our focus at Portfolio 2020 isn’t necessarily high yields. Rather, we’re picking companies that are tapped into the trends that are reshaping the global economic, political and social fabric for the 21^st century.

Our approach is a patient one: To buy these companies as cheaply as possible and hold on as their business plans reach fruition. We can and do take profits from time to time on positions that seem to move too far, too fast, with the ideal of buying back more cheaply later on. But by and large, we’re playing this game to build long-term wealth in a way that transcends the near-term ups and downs in the market.

That said, most of the Portfolio 2020 companies offer at least some dividend yield, in the case of the companies highlighted below, a substantial amount. Again, their primary attraction for us is to build wealth. But a cash return is the surest way to realizing that goal. Moreover, it’s an outward sign of inner grace, mainly strong growth in the core business and by extension the share price.

Note that most of these companies pay dividends in foreign currency. That also makes them a hedge against further US dollar weakness: The US dollar value of their dividends rises as the greenback’s value drops.

BASF (GER: BAS, OTC: BASFY)—yield 4.1 percent, five-year dividend growth rate 23.5 percent, paid in Euros—is rapidly putting a tough 2009 behind it. The global chemicals giant remains a leader in the chemicals that drove 20^th century industry, from which it continues to reap hefty cash flows. More important to us, it’s successfully tacking to leadership in the kind of chemicals that will drive 21^st century industry in increasingly cleaner and more efficient ways.

This week, the company moved aggressively to reposition itself in one of those rapidly changing areas: The global pigment market. This business has become increasingly commoditized in recent years and the company has responded by dramatically expanding it product line with the acquisition of Ciba, and then sharply streamlining operations.

The current plan will shave 500 of the current 2,900 jobs at the unit, closing individual production plants at six sites in the Americas and Europe. This will eliminate overlaps in global production, while allowing faster alignment of output to market demand. The increased use of scale will boost profitability, even as the company moves to do the same with its other more traditional businesses, such as personal care and home chemicals with a rumored bid for Germany’s Cognis GmbH.

Long-term, BASF’s fortunes lie with its push into new technology. Nothing will fund that like greater profitability in the sales of existing products, which the streamlining will spur even as a series of price increases kick in and the global economic recovery revives demand. Dividends are paid annually. The good news is there’s another big one likely to be declared in the next couple of weeks, with a likely mid-May payment date. Buy up to EUR45 (USD65) if you haven’t yet.

Emera (TSX: EMA, OT: EMRAF)—4.6 percent yield, 3.5 percent five-year dividend growth rate, paid in Canadian dollars—is yet another example of a traditional utility/energy company moving quickly to lead 21^st energy development. As do US companies, it pays dividends quarterly and the Canadian dollar moves with oil prices, making it a natural inflation hedge.

The company’s core business is electricity, with most revenue earned by core unit Nova Scotia Power along with Bangor Hydro Electric in Maine. NSPI and BHE together serve roughly 603,000 customers and will add another 36,000 later this year when Emera completes its proposed acquisition of Maine & Maritimes Corporation (NYSE: MAM).

The company is also pursuing the joint acquisition of a California power distribution company with Algonquin Power & Utilities (TSX: AQN, OTC: AQUNF). Structured as a 50-50 joint venture, the companies will acquire a 12-megawatt generator and power lines supplying 47,000 homes and businesses in the eastern part of the state. The venture will also gain a low-cost foothold for developing renewable energy in the state.

Meanwhile, Emera is also acquiring 9.9 percent of Algonquin with an option to buy another 5 percent. And with a market cap seven times that of Algonquin, it could easily swallow the rest in coming years, gaining stakes in another 53 water and power projects in the US and Canada. The tidal power project in the Bay of Fundy continues to advance, as is growing wind portfolio. Buy Emera up to CAD25 (USD25).

Hyflux Water Trust (HYFT SP, OTC: HXWTF)—7.6 percent yield, 15.2 percent five-year dividend growth, paid in Singapore dollars—dishes out cash to shareholders twice a year. With the most recent payout made March 29, investors will have to wait until last September for the next disbursement. But if the past year is any indication, we can also look forward to robust growth, making it well worth the wait.

The company is basically an income generating play on the rapid growth of Hyflux, which invests in major water infrastructure projects around the world. The project line includes water and wastewater treatment, water recycling, desalination and water distribution, putting it in line to profit not only from the growing global need to clean up increasingly degraded water supplies, but from the growing shortage of supplies particularly to rapidly urbanizing Asia.

The company’s primary markets are China, India, the Middle East and North Africa, all very parched areas with rising populations where contacts are key to winning new business. And certainly management is having few problems boosting revenues and profits. The shares have run in place the past couple months but the stock remain a buy up to USD1.50.

Iberdrola (Spain: IBE, OTC: IBDRY)—4.7 percent yield, 4.4 percent five-year dividend growth, paid in Euros—has seen its partially spun off renewables unit post 26.2 percent output growth thus far in 2010 versus year earlier levels. That’s despite still sluggish demand for power throughout its mainly European markets, particularly recession hit Spain where output rose 35.8 percent.

The company’s success is due to its growing prowess in locating, building and operating profitable new projects. The company added 1,671 megawatts of new capacity over the last 12 months, much of it in the US where it has a rapidly expanding presence, and is now the world’s leading wind power producer by installed capacity. Dubbed Iberdrola Renovables, the unit is fastest growing part of the Iberdrola empire but by no means the only bright spot for the company, which controls 43,667 megawatts of capacity overall.

As for the parent, overall power production capacity is 30 percent natural gas, 25 percent renewable energy and 23 percent hydropower, with much of the rest nuclear. As such, it’s in prime position to profit from a world in which controlling carbon dioxide emissions is increasingly vital, despite the demise of cap and trade legislation in Washington, DC this year.

Coupled with a share price of just 1.21 times book value, that feature has increased Iberdrola’s potential as a takeover target. In fact, a major Spanish conglomerate has apparently been accumulating shares, spurring merger speculation. I like Iberdrola with or without a deal up to EUR10 (USD14).

Kinder Morgan Energy Partners (NYSE: KMP)—6.3 percent yield, 7.9 percent five-year dividend growth, paid in US dollars—is no longer the biggest US master limited partnership by assets, having been overtaken by Enterprise Products Partners (NYSE: EPD). That, however, hardly dims the appeal of the owner of fee-generating energy infrastructure, which continues to add assets and dividend-paying power with acquisitions and targeted construction.

This week, Kinder closed the purchase of a 50 percent stake in Petrohawk Energy Corp’s Haynesville Shale pipeline assets for $875 million, further leveraging itself to the technologically-driven growth of US shale gas assets. Haynesville and other shale formations are yielding more potential output than the current pipeline network can carry. That’s a trend that should extend many years ahead, yielding ever-more opportunities for Kinder to grow its income earning base.

The company’s stake in projects utilizing carbon dioxide to increase oil and gas well yields are already generating solid income and are in line to grow rapidly in coming years. CO2 is highly corrosive to most existing pipeline infrastructure, giving Kinder a solid head start. Meanwhile, the company has also picked up a range of ethanol assets, another industry where the federal government has basically mandated profits.

 It all adds up to a solid growth picture for Kinder in the years ahead, and a prime opportunity for investors to score a high yield in a company well placed for a 21^st century economy. Buy Kinder Morgan up to 65 for growth and income.