Some Things Never Go Out of Style

With many stocks dropping over the past few months, the media is touting the power of dividends. My favorite is a recent article in USA Today, where analysts and researchers make obligatory comments about why companies with robust dividend payments make sense in a bumpy market.

The argument for dividends
Don't get me wrong: It's great to hear the media calling out our beloved dividend payers as investment ideas, but the tone of these articles is decidedly short-term. The USA Today piece, for example, cites S&P data showing that through July of this year, dividend-payers are up 4.3%, while non-dividend-payers are down 3.3%. That's a significant difference, but unfortunately that short time period says nothing about what the future holds.

Dividend-payer Pepsico (NYSE:PEP) is up 6.1% this year (including dividends), but that doesn't mean it's always going to outperform a non-dividend-payer like Coach (NYSE:COH), which is down 10.3% for the year. Investing just isn't that simple.

Narrowing the field
Selecting the right dividend-payers requires understanding the balance between the current valuation, the current yield, and the likelihood of increases in dividend payments. When recommending companies for our Motley FoolIncome Investor service, lead analyst Mathew Emmert focuses on companies that have more than enough free cash flow (FCF) to cover their dividends as well as strong prospects for growing FCF and dividends in the future. Income Investor selection Diageo (NYSE:DEO) is a perfect example of this, and the four companies below are attractive as well:

The real deal
The recent attention being showered on dividend-paying companies isn't entirely misplaced: Dividends do offer protection and support in a falling market. But dividend investing also offers much more. Many dividend-payers can also outperform in a bull market, and with growing payouts, they provide cash for continual reinvestment. That's a tough combination to beat.

To learn more about dividend-paying stocks and buying high-quality companies at reasonable prices, take a free 30-day trial to Income Investor. Focusing on dividend-paying companies such as Diageo has the service beating the market by more than 6 percentage points overall. Click here to learn more.

At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. Diageo is an Income Investor selection. The Fool has a disclosure policy.