Multinationals Yield Income in a Down Market 

In fact, Morningstar concluded that even in the last 20 years through 2010—a period of relatively low dividends—they accounted for 27 percent of the market’s gains.

“With two bear markets in the past 11 years, people who’ve owned dividend stocks are way ahead of the game,” says Taylor of North Star Investment Advisors.

When tech investing swept the country in the mid-1990s, dividend investing was bypassed as investors focused instead on stocks’ potential for price gains. We know what happened with the tech bubble, and now companies such as Microsoft

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[MSFT  Loading...      ()   ], Intel

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[INTC  Loading...      ()   ] and even Cisco

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[  Loading...      ()   ]are paying dividends.

Tech companies are the poster boys these days for finally deciding to pay a dividend,” says T. Rowe Price's Huber. “They’ve come to realize they aren’t the growth company they once were, that it makes sense to start paying out. It reflects a management team focused on the shareholder, which is a pretty important indication for us.”

Taylor noted that Intel now pays a 4 percent dividend after increasing it 15 percent in the last month. And Microsoft announced this week a 25 percent dividend boost, bringing it to 3 percent. Cisco is a bit of a latecomer, he says, making its first 1.5 percent dividend payments this year.

Dividend-paying stocks are the “decathletes of the equity market,” says Fidelity's Offen. “They don’t usually come in first in any one event. But as an asset class they have tended to be consistent—and that consistency can help them win over the long term.”

According to a December 2010 Fidelity Viewpoint newsletter, growth in dividend payments often tends to be more reliable than earnings growth. Since 1946, dividend growth rates have had a standard deviation of 6 percent, compared with 16 percent for earnings growth rates.

Fidelity notes how dividend payments can help offset price declines. In the previous decade, while prices of stocks in the S&P 500 fell an average 2.3 percent annually, the index’s annualized total return fell only 0.5 percent, meaning that dividend income contributed 1.8 percentage points a year to the total return.

“There’s still a perception that dividend-paying companies are no longer growth companies, that if they return the money to investors it means there are no good opportunities for them to grow,” says Huber. “If a company is growing 20 percent a year, the chances of it paying a dividend are low, but we balance out expectations, especially in the current climate. If a company is paying a dividend and growing at a 5 to 7 percent annual range, we think it’s a healthy level of growth.”

Ten thousand baby boomers a day are reaching age 65, Taylor says. “What are they going to live on? Not money market funds or T-bills. Their homes are no longer ATMs. Social Security and Medicare are in jeopardy. There aren’t any pensions and they haven’t saved enough to retire," he says. "They’re going to have to work longer and put money into something that produces meaningful income. The only good alternative they have is to own these kinds of companies.”

Focus on companies that are selling to Latin America, China, and India, says Taylor, “where a burgeoning middle class wants our goods. A weak dollar, if it continues, keeps our goods cheaper. The wind is at the back of dividend-paying multinationals for all those reasons.”