Look for Dividend Growth

At 2 percent, the dividend yield of Shearer's fund is less than the 2.2 percent yield that the S&P 500 sported as of Sept. 8. That's all right with Shearer, because he's seeking growth in the form of rising dividends and also rising stock prices. Stocks that pay out bigger dividends often have less potential, he says.

To pick dividend-paying stocks, Shearer goes through a "bottom-up process" of examining each company, meeting with management and finding industries and sectors with favorable dynamics. Individuals can't do such intense due diligence, but can benefit from his advice on what metrics and industries to focus on.