Dividends Are Hot

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Sometimes things that have been around for a long time become very fashionable. Take protein, for example. Thanks to the popularity of the Atkins diet in recent years, protein has been "in," while carbohydrates became second-class food components. (Though Atkins' popularity may be waning, and if so, Tim Beyers has suggested some promising high-carb stocks.)

In the investing world, dividends appear to be hot right now. I'm amused at how various kinds of investments rise and fall in popularity over the years, as I suspect that the systems that work best will work always (the same goes for plumbing). Nevertheless, I welcome any attention that dividends receive, because dividends can contribute a lot to a portfolio's growth.

In a recent Associated Press article extolling the virtues of dividends, Meg Richards noted that:

• Dividend-oriented mutual funds have increased in number from 54 in 1999 to 81 in 2004. (Lipper data)
  
• "Historically, dividends have made up a significant share of total return; long-term studies dating back to the 1920s show dividends account for about 42 percent of total return on an annualized basis." (John L. Nichol of Federated Investors)
  
• "From 1972 to 2004, dividend-paying stocks rose 10.2 percent on an annualized basis, while non-dividend stocks rose just 4.4 percent." (Ned Davis Research)

So what should you do? Well, here are some ideas:

• Consider dividend yield whenever you're evaluating a company as a possible investment. Add it to the factors you assess. Just as important as the amount of the dividend, though, is how often and how significantly the company increases its dividend -- and how reliably you can expect it to continue doing so. (Mathew Emmert explains how dividend growth might lead you to hefty 20% yields.)
  
• Remember that not all firms with big dividend yields are good investments. Sometimes dividends get reduced or eliminated. Embattled Ford (NYSE: F) auto-part spin-off Visteon (NYSE: VC) recently announced, for example, that it's suspending its dividend program entirely. Bye-bye, 2.6% yield. If you could use some help identifying firms with solid growth prospects and attractive dividends, take advantage of a free sample of our Income Investor newsletter.
  
• Consider mutual funds, too, which sometimes focus on dividend payers. Meg Richards offered three promising ones: Royce Total Return (FUND: RYTRX), Vanguard Equity Income (FUND: VEIPX), and American Century Equity Income (FUND: TWEIX). For additional attractive mutual funds that focus on all kinds of things, such as the international arena or small-cap companies, grab a free copy of our Champion Funds newsletter.

Finally, consider learning more about DRIP investing, which offers an effective way to reinvest your dividends, boosting your performance further. And drop by our Dividend Growth Investing discussion board, too.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.