By Steve Zeller

Investments

It wasn’t all that long ago, not even two years, when many investors still put more faith in a company’s story than a company’s earnings. And as several stocks’ prices grew well beyond acceptable P/E ratios, the idea of dividend investing wasn’t thought about much at all. But with the market’s recent volatility, investors started to realize that considering dividends in your investment strategy isn’t such a bad thought after all.

While dividends don’t offer the scintillating story that grabs a lot of headlines, they do offer a number of benefits that should garner some well-deserved attention, such as accentuating a stock’s total return, providing a cushion to your portfolio during market downturns and generating income either for current needs or for reinvestment purposes. While a stock’s high dividend yield may be enticing, the yield often does not tell the whole story. In fact, if a yield is too high, it could be influenced by a falling stock price, and a falling stock price could be the result of a company’s weakening fundamentals.

The following checklist can be used when incorporating dividends as part of your stock-investing strategy:

1. Examine a company’s financial fundamentals. A company most likely to pay dividends will have good earnings visibility, strong cash flow and a proven track record of building its business over a long period of time.

2. Diversify, diversify, diversify. Dividends notwithstanding, investors should select stocks in a variety of business sectors to prevent any one stock or industry from having an overwhelming effect on your portfolio’s overall performance. Spread your stock investments around multiple sectors such as healthcare, financial services, energy, consumer goods, technology and real estate, just to name a few.

3. Check the company’s record of dividend payouts. Seek out those companies that not only have a long history of increasing their annual dividends, but that also show the potential for continuing to increase those dividends. Because past performance cannot guarantee future results, make sure the company is in a strong enough financial position to keep increasing those dividends. A commitment to dividend increases generally indicates a company’s confidence in its financial stability. It can make the investment worthwhile not only as an income-generating vehicle but also a high-quality investment for your long-term financial goals.

4. Monitor your stocks on a regular basis. You’ve heard the saying, “here today, gone tomorrow.” This would certainly apply to dividend payments.

An investment firm recently conducted a 21-year dividend study of all companies on the New York and American stock exchanges and the Nasdaq market. The study revealed that more than 1,000 companies had increased dividends at least nine out of the previous 10 years through 1989. However, through the year 2000, only 455 companies emerged from the same screen. This means that more than half of these companies failed to sustain the same record of paying higher dividends over the next 11 years. The companies that were, in fact, able to sustain their record of increasing dividends over that period represent only about 8 percent of all stocks studied.

The bottom line is that you should continue to evaluate your stocks regularly to ensure they still meet your long-term needs, will still provide the increasing dividend income you want, and will allow you to feel comfortable with your investments.

Steve Zeller is a financial consultant with A.G. Edwards & Sons., Inc ., member SIPC , 379 Lytton Ave., Palo Alto 94301. The phone number is 326-5010.