Coming off the worst year in more than half a centuryfor dividends, investors need to rethink their strategies for income generation.

Gone are the days when you could buy a dividend-paying stock simply because it's a blue chip, and forget about it until retirement. The quick annihilation of dividends at once-reliable companies like Wachovia quickly dispelled that illusion.

For that matter, you'd also be wise to disregard mechanical strategies like dividend-weighted exchange-traded fundsthat might only work under "normal" market conditions.

Instead, it's time to get back to basics.

The keys to success
When researching strong and sustainable dividend-paying stocks for your portfolio, you'll want to focus on those that meet these five criteria.

1. An above-average dividend yield: If you're specifically setting out to find an income-generating stock, make it worth your while. There's no reason to settle for a below-average yield, so use the S&P 500 as a benchmark and screen for stocks with yields above the index's average (currently around 1.8%).

2. Sufficient free cash flow cover: Earnings are an accountant's opinion, but cash is a fact. It's important that the company generates enough free cash flow (cash from operations minus capital expenditures) to cover its dividend payouts. If the dividend payouts significantly outweigh the free cash flow, the sustainability of the dividend is in question. A reasonable free cash flow payout ratio (dividends paid / free cash flow) should be below 80%.

3. A history of dividend hikes: While a good track record in itself is no guarantee of future payouts, I do like to see a dividend-paying company with a history of rewarding shareholders by increasing its payout in line with earnings growth. Stanley Works (NYSE: SWK) has boosted its payout for 42 consecutive years and Emerson Electric (NYSE: EMR) has done the same for 53 years.

4. A solid balance sheet: As we've been reminded over the past 18 months, creditors have a greater claim to a company's earnings and assets than common shareholders. If a company can't repay its creditors, it won't be able to pay you dividends. Look for stocks with interest coverage ratios (EBIT / interest expense) of more than 3.0, but preferably higher. A company with an interest coverage ratio below 1.5 is in danger of being unable to repay its creditors.

5. Undervalued versus the market: You want to buy dividend-paying stocks when they're trading at value prices. Outside of doing a formal discounted cash flow valuation, a good rule of thumb is to look for companies trading at price-to-earnings multiples below the current S&P 500 average (today, it's about 16 times next year's earnings).

There are no hidden tricks or magic formulas here, just reasonable and traditional criteria to help us find strong dividend stocks.

Gimme shelter
Using these five criteria, I screened for stocks trading on a major U.S. exchange with a market cap of more than $1 billion.

Here are five of the results:

Company

Yield

FCF Payout Ratio

3-Year Dividend Growth Rate

Interest Coverage Ratio

Forward Price-to-Earnings Ratio

Molson Coors
(NYSE: TAP)

2.1%

26%

11%

4.8

11.7

Waste Management
(NYSE: WM)

3.5%

53%

10%

4.6

15.9

Eli Lilly
(NYSE: LLY)

5.5%

54%

7%

22.3

8.2

Reynolds American
(NYSE: RAI) Continued...