Investing for dividends has always been a tactic to produce stable monthly income for retirement.  However the investment climate changed in the 1990s when stock prices soared to unprecedented highs.  Even some of the most cautious investors jumped on the bandwagon for quick capital gains and dividends were all but forgotten.  After the tech stock debacle toward the end of the decade, investors seeking stability returned to reality and dividends have once again come into favor.

Dividends: The Cash Cow

Since the dividend resurgence started early in the new millennium, stocks that pay dividends have steadily overcome their reputation as lackluster performers.  In fact, according to Standard & Poor’s, dividend-paying companies returned 18.4{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} in 2006, compared with 13.7{099636d13cf70efd8d812c6f6a5a855fb6f8f27f35bea282d2df1d5ae896e2c2} for stocks of companies not paying dividends.  That means dividend-paying investments are not only offering the potential for steady income, but also capital gains have become an added bonus.

One of the hallmarks of stocks that produce dividends is that they tend to hold up well when markets experience downturns – even though they don’t tend to soar in bull markets.  For that reason, dividend producing stocks can often smooth out volatility in a portfolio when investors see fluctuations like we’ve experienced during the past few years.

Regular dividend payments also tend to be a sign of a company’s good health.  By paying shareholders a portion of the profits, companies attempt to indicate confidence that growth will be ongoing.  What’s more, reinvested dividends can account for a major portion of a stock’s total return over time.  However, because dividend payments generally depend upon the financial well-being of a company, such payments may be discontinued by a company’s management.

More Companies Now Offer Dividends

After their day in the sun and subsequent downfall, technology and other more volatile stocks were frowned upon by many investors for their overvaluations.  Since then, some have turned around and are proving their worth by paying dividends to shareholders.  This trend signals that these types of companies are returning to favor and that investors may want to consider them for reasons other than short-term capital gains.

How to Participate in the Resurgence of Dividends

If you’re looking to increase your holdings in dividend-producing stocks, consider companies that are well-established with solid earnings and dividend growth track records.  Many experts use complicated formulas for determining acceptable dividend yields, but the average investor may not have the time or inclination for such math.

An easier way to participate in the resurgence of dividends is to invest in mutual funds of stocks with that objective.  One of the advantages of mutual funds is that they are professionally managed so you don’t have to worry about individual stock selection. Experienced professionals manage a portfolio of securities and decide when to buy and sell holdings based on extensive research.  As economic conditions change, managers adjust the investment mix so it continues to help meet the fund’s goals.

As always, you should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing.  A knowledgeable financial advisor, in conjunction with a qualified tax and legal professional, can be a valuable asset if you need help making dividend producing mutual fund selections.