(MONEY Magazine) – If you are retired and younger than 75, you know that at least 50%--better yet, 60%--of your assets should be in equities. Because your paycheck quit when you did, growth in your principal must take the place of raises. At the same time, you have to be cautious about how you get that growth, since there won't be any year-end bonus to make up for investment losses. That's why about half of your portfolio's equity holdings should be in growth and income stocks. These shares hold inflation at bay through a combination of price appreciation and generous dividend yields.

Growth and income stocks also offer something else: a buffer against market risk. Over the past 10 years, the mutual funds that invest in these types of stocks have returned an average of 12% a year vs. 12.9% for the growth funds; but the growth and income portfolio was exposed to 17% less risk of loss than the average growth fund, according to Morningstar, the fund ranking service. So as a growth and income investor, you accept a smidgen less in growth in exchange for a lot less risk. Not a bad trade-off, particularly considering that MONEY's investment strategist, Michael Sivy, thinks the Dow Jones industrial average may decline 15% in the year ahead.

Why do the companies that offer growth and income perform so well? "The firms with high dividend yields tend to be the leaders in their markets," explains James O'Shaughnessy, an investment adviser in Greenwich, Conn. and the author of What Works on Wall Street (McGraw-Hill, $29.95). "They have stronger sales and more cash than the average corporation." When the market tanks, these dividend payers cushion a portfolio against losses.

Your overall objective when buying growth and income stocks ought to be outpacing inflation now and forever. Says Bob Glovsky, director of the program for financial planners at Boston University: "To provide significant income, the stocks in your growth and income portfolio should have an average yield that matches today's 3% inflation rate." Bear in mind, that 3% beats the market's current 2.2% average yield. Glovsky also says that you must "aim for 5% price appreciation annually." That's the only way your money will grow faster than the 4.8% rate that inflation has averaged since 1961. Put those two goals together, and you're looking for companies that dependably produce an annual total return of at least 9%.

The trick, of course, is finding these steady performers. To do so, MONEY consulted with more than a dozen fund managers and investment advisers. We asked them for the most successful strategies to select such stocks. Turns out, there are three ways to pick the apples from the trees: Buy high yielders with the largest market capitalizations in Standard & Poor's Compustat index, shares with dividend yields at or near their historic highs, and stocks with dividends that have increased in at least five of the past 12 years.

Though these strategies differ, the stocks they turn up share certain traits. The companies tend to be large blue chips in industries that are currently out of favor or firms that have endured temporary rough times and are now poised for a turnaround. As a result, their stock prices have been pushed down, which in turn lifts their dividend yields up. Below, we discuss each of the three strategies and the 11 stock picks that emerged from them. All the shares are traded on the New York Stock Exchange, except where noted, and they are listed within each category in order of their expected 12-month total return. (See the table on page A4 for details on the stocks.)

1. BUY HIGH-YIELD STOCKS WITH THE LARGEST CAPITALIZATIONS.

James O'Shaughnessy uses this strategy to select the stocks for his $1.5 million Cornerstone Value Fund (no load; minimum initial investment: $5,000; 800-797-0773), one of the four mutual funds his firm launched in October. He has found that these stocks consistently outperform the market as a whole. Between 1976 and 1995, if you had invested in Standard & Poor's Compustat 50 largest stocks with the highest yields, you would have had an average annual return of 18.8%, while the S&P itself produced only 14.6%.

O'Shaughnessy believes the disparity reflects the fact that these outfits historically have sales that are 50% higher than the S&P Compustat company average. Higher sales produce cash flows that permit management to adjust to changing business needs while raising their dividends. In addition, the shares are so widely held that their prices are less volatile than smaller firms. "Since the dividend yield often accounts for more than half a stock's total return," he concludes, "concentrating on large stocks paying high dividends creates a magic brew."

To find the companies that pass his test, O'Shaughnessy screens the 9,000 shares in the S&P Compustat database for those that exceed the average stock in market capitalization, cash flow and the number of shares outstanding. From that group he culls companies that have annual sales that are at least 50% higher than the market's average. Then out of the issues still standing, he buys the 50 offering the highest dividend yields. Here are four stocks that currently top his list and meet the requirements of at least a 9% total return:

Bankers Trust New York (ticker symbol: BT; $86; 4.6% yield). This $118 billion bank is back on track after a tumultuous three-year period that featured a steep drop in profits and a change in top management. "Under the new CEO, Frank Newman, the company has turned from damage control to building the bank's major businesses," says Lawrence Cohn, an analyst at Paine Webber. He believes that Bankers Trust's new strategy of building relationships with clients instead of focusing on one-shot business transactions seems to be working. Investment banking profits have more than doubled since 1994, to $340 million last year. As investment banking continues to expand, particularly in growing overseas markets like Latin America, Cohn thinks earnings will be up 14% in 1997. He expects a total return of 21% in 12 months, with the stock rising to $100.

BCE (BCE; $49.50; 4.2%). With revenues of about $59 billion, BCE is Canada's largest telecommunications company and an impressive comeback story. The company's market share declined in 1994 as competition among carriers heated up. Then Canada's Radio/Telecommunication Commission axed bce's attempt to raise rates for the first time in 10 years. The commission was finally overruled by the Canadian cabinet in 1996, and the phone company was allowed to boost rates a substantial $2 a month through 1998. Moreover, "Management is engaged in an ambitious cost-cutting program that should save $1.3 billion (U.S.) by year-end 1998," says Winifred Fruehauf, an analyst at Levesque Beaubien & Geoffrion in Montreal. He puts the stock at $56 in 12 months, for a 17% total return.

J.C. Penney (JCP; $52.25; 4%). With more than 1,250 stores, Penney sells more Levi's Dockers pants than Levi's does in its own stores. But like other merchants, the Plano, Texas retailer has been enduring weak sales in women's apparel--which accounts for 40% of its revenues. Over the past 18 months, the company tried unsuccessfully to emphasize its private-label merchandise just as customers wanted brand names. "Now Penney is improving the quality and stylishness of its private-label clothes and making sure at least half of the items in the store are national brands," says Jeffrey Edelman, a retail analyst at Deutsche Morgan Grenfell. Edelman expects the back-to-brands move will boost earnings at least 16% over each of the next two years, taking the stock up to $59 in 1997. Add in Penney's yield, and the projected '97 total return is a healthy 17%.

Reader's Digest (RDA; $38; 4.7%). This $31 billion publisher in Pleasantville, N.Y. has two key assets: its well-loved household name and a database of the purchasing patterns of 100 million households worldwide. The company doggedly mines its database for direct-mail solicitations of books and videos. To expand its reach, Reader's Digest recently reached an agreement with Spiegel to create catalogues featuring bed and bath items for those 100 million households. The company is also tending to its sagging European sales by focusing on the homes with the highest response rates, which will reduce its mailing list by 20%. That could nudge earnings up around 5% in 1997 and '98 as the company deals with bloated operating costs in Europe. Then, profits may start to grow at a double-digit rate in 1999, says John Eade at Argus Research. That improving outlook could be enough to bump the stock to $41 in 12 months, for a 13% total return.

2. BUY STOCKS WHOSE YIELDS ARE AROUND HISTORIC HIGHS.

Stephen Boesel, the manager of T. Rowe Price's Growth & Income fund, looks first for high dividends and only secondarily for earnings growth. That approach is precisely the opposite of the one used by most growth and income fund managers, who use computers to screen initially for growth. But Boesel's strategy has earned him an 18% annual average return since he took over the fund in 1987, vs. 15% for growth and income funds measured by Morningstar over the same period. So it's hard to argue with him.

After making sure a company is yielding more than the overall market, Boesel eliminates any firms whose dividend is not at or near its historic peak. "This indicates we are getting the stock at its best valuation--a beaten-down price with a record yield," he says. Then he proceeds to focus on industry groups where he anticipates that both earnings and dividends are trending higher. Currently, his approach is leading him to natural-resource stocks and utilities. Boesel recently added these four issues to his fund:

Centerior Energy (CX; $10.50; 7.4%). With headquarters in Cleveland, Centerior provides electrical energy for the Ohio Valley. The company is scheduled to be taken over at the end of 1997 by the more efficiently run Ohio Edison for $1.5 billion. That acquisition will create the 11th largest electric utility in the U.S., and the savings from combining personnel and operations is expected to reach $1 billion over the next 10 years. That could push Centerior's stock--the combined company will be known as FirstEnergy once the deal is completed--to $13 over the next 12 months according to Steven Fleishman at Merrill Lynch. Add this price increase to the company's eye-popping yield, and investors can expect an electrifying 31% total return.

USX Marathon (MRO; $22.75; 3.3%). A cold fall in 1996 sent fuel oil prices up 7% in October--a nice jolt in profits for this $15 billion energy company. But Marathon isn't relying solely on rising fuel prices. Over the past few years, it has also reduced production costs and sliced off $1 billion in long-term debt. The lower debt translated into a $35 million saving in interest payments in 1996. In addition, Marathon, located in Pittsburgh, has several extensive exploration and development projects in the pipeline. One field in the Gulf of Mexico is expected to come on line at the end of '97, and others should be active by 1998. Bruce Lanni at Oppenheimer thinks annual profits will be up 10% annually through the end of 1998, bumping the stock to $24.50 within 12 months, for an 11% total return.

James River (JR; $32.50; 1.8%). Boesel admires the $6 billion papermaker's new CEO, Miles Marsh, who joined the Richmond company in 1995 from Pet Inc. Marsh moved fast to upgrade manufacturing operations and boost the production efficiency of the firm's Brawny paper towels, Vanity Fair napkins and Dixie cups. In addition, he has jettisoned less profitable businesses; in 1996, he unloaded Flexible Packaging for $365 million. Nearly half the proceeds went to debt repayment, and the rest was used to buy the remaining interest in James River's highly profitable European tissue subsidiary. "The effort to refocus the business and pay down debt should lead to an increase in profit margins through the year 2000," says Mark Rogers at Prudential Securities. He thinks investors will enjoy a 10% total return in 1997 as the stock's price climbs to $35 in 12 months.

McCormick & Co. (MCCRK; NASDAQ, $24.25; 2.3%). The world's leading manufacturer of spices and flavoring, $1.9 billion McCormick has been reviewing its businesses with an eye to unloading bland performers. That has already resulted in the $257 million sale of Gilroy Energy, a supplier of co-generated energy, and Gilroy Foods, which manufactured dried onion and garlic. And, says Nomi Ghez, analyst at Goldman Sachs, "The company is also talking about raising the stock price by buying back 10% of the shares over the next two years." Ghez applauds these moves and thinks they will pepper earnings by 20% in 1997, sending the stock to $26, for a total return of 10%.

3. BUY STOCKS THAT HAVE RAISED THEIR DIVIDENDS IN FIVE OF THE PAST DOZEN YEARS.

Geraldine Weiss, senior editor and publisher of the acclaimed Investment Quality Trends newsletter in La Jolla, Calif. ($275 a year; 619-459-3818), invests only in companies that have withstood the test of time. Not only must they have increased their dividends in at least five of the past 12 years, but they also could not have cut or canceled a payout in 25 years. "That's proof they have a commitment to their investors," Weiss explains. To make her final cut, a company's earnings must have risen in at least seven of the past 12 years. "Consistent earnings growth shows a company can still expand during the tough years," she notes.

Weiss' picks have earned her readers a 12.6% average annual return over the past 10 years, according to the Hulbert Financial Digest, which ranks 160 investment newsletters by the market performance of their recommendations. Her three top picks today:

Deluxe Corp. (DLX; $30.75; 4.8%). This $2.1 billion St. Paul firm is the largest printer of checks and related financial forms in the U.S., with a commanding 51% market share. "The firm has been undervalued since 1993 because everyone knows automatic computer transfers will eventually make check writing obsolete," says Weiss. Management knows that too, and as a result Deluxe executives are "extremely focused on boosting sales and profitability in several areas of financial services, including collection, funds transfer and direct marketing," says Rudolph Hokanson, who follows the stock for Deutsche Morgan Grenfell. Because of the company's software products for database management at banks in particular, Hokanson sees the stock at $50 in 12 months, for a total return of 67%.

Luby's Cafeterias (LUB; $22; 3.6%). If you've driven through the South lately, you've undoubtedly passed one of Luby's 220 eateries. All the food is made from scratch, and the managers are motivated to provide excellent service because they're compensated on the basis of sales. But, says Janice Meyer of Donaldson Lufkin & Jenrette, "cafeteria dining appeals to price-sensitive seniors and value-oriented families, which makes it difficult to raise prices." As a result, the $505 million San Antonio company is searching for growth by opening its first casual-dining seafood restaurant in San Antonio called Waterstreet. Meyer figures expansion efforts and future acquisitions will increase revenues more than 10% annually over the next two years, sending the stock to $25 by the end of 1997, for a 17% total return.

Nash Finch (NAFC; NASDAQ, $19.25; 3.7%). Not to be confused with the Don Johnson TV series Nash Bridges, Nash Finch owns more than 110 supermarkets in the Midwest, West and Southeast and packages and markets groceries through 16 wholesale distribution centers across the country. When the $3.2 billion Minneapolis-based firm completes its $173 million takeover of competitor Super Food Services, it will become the nation's third largest food wholesaler with annual revenues of $4.5 billion. Robert Greene, who follows the company for Value Line Investment Survey, points out that the company has posted seven consecutive quarters of earnings growth. He expects the record to continue "well into 1997." That momentum will also lift the stock to $20.75 in 12 months, he believes, for an 11% total return.

Now wouldn't it have been sweet if your paycheck grew like that when you were working?

Reporter associate: Jennifer Zajac