Most investors have welcomed the stock market's rally throughout the past year. But for those looking for ways to generate income from their stock portfolios, rising share prices have had a downside as well.

Coming full circle
This time last year, you needed nerves of steel to be excited about investing in stocks -- and dividend-paying stocks in particular. In response to the financial crisis, many financial companies, including Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM), had cut their dividends to a pittance. And the carnage went way outside the financial industry, as even companies like Dow Chemical faced enough financial difficulties to warrant slashing its dividend for the first time in nearly a century of making payouts.

Yet even despite the economy's challenges, many stocks found ways to maintain their dividends. As a result, if you were brave enough to buy shares near the market's lows last year, you picked up some amazing dividend yields. Just take a look at some of these dividend-paying winners:


Dividend Yield as of Jan. 21, 2009

Dividend Yield as of Jan. 21, 2010




Caterpillar (NYSE:CAT)






PPG Industries (NYSE:PPG)



Tyco International (NYSE:TYC)



Source: Yahoo! Finance.

As you can see, those yields have dropped substantially over the past year. That's making it a lot more difficult to find high-quality stocks that can meet your income needs.

Cashing in
Of course, if you actually bought those stocks in early 2009, you've been well compensated for your investment. In exchange for losing a percentage point or two on your yield, you've seen your shares rise 50% or more. That's a tradeoff that nearly anyone would take.

Going forward, though, the question becomes more difficult to answer. As you accumulate more money to invest, where's the best place to put it to generate the dividend income you want?

Focus on growth
As extraordinary as these yield movements may seem, they're actually part of a constant process. As stock prices move, your yields fluctuate. And although the rally we've seen since last year is anything but commonplace, price movements over longer periods of time have often amounted to even larger changes in yield.

Share price, however, is just half of the equation. The other thing to look at is growth in the company's dividend itself. If you find companies that will consistently raise their dividends in good times and bad, then your income can keep up, even as your stock rises over time.

For example, in late 2004, Intel's dividend was just $0.04 per quarter, which amounted to less than a 1% yield based on Intel's share price at the time. But since then, Intel's payout has more than tripled. In that light, its current 2.7% yield looks pretty healthy -- and investors can look forward to further growth in the future.

Dividend growth means a lot more than just more money in your pocket. It demonstrates a company's commitment and ability to generate increasing amounts of cash flow in order to finance its rising dividends. That's one reason why investors value long histories of steadily rising dividends: Only strong businesses with healthy fundamentals can successfully produce the profits that allow these companies to sustain their payouts year in and year out.

Don't give up
So if you missed out on last year's opportunity to grab strong dividend stocks at highly attractive yields, don't beat yourself up too much. But don't use it as an excuse to pass up those stocks now, either. Even though their yields aren't as high as they were this time last year, that won't be important in the long run. What will be important is picking stocks whose payouts you can expect to grow over the long run. That way, your stocks will provide you with the income you need to make handling your finances a snap.

Dividends have always played a key role in investing. Let Chuck Saletta show you how ordinary investors trounced the lost decade.

Fool contributor Dan Caplinger looks for dividends in everything he does, but he rarely finds ones as good as what stocks pay him. He doesn't own shares of the companies mentioned in this article. Intel and 3M are Motley Fool Inside Value recommendations. PPG Industries is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended buying calls on Intel. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy tried putting up "lost dividend" signs on street corners, but nobody called with any leads.