Despite a rash of recent cuts, playing dividends continues to be an important tool for investors, financial advisers say.
A number of high-profile companies have slashed their dividends this year as a way to preserve capital in tumultuous times, and investors counting on those dividends have gotten burned in some cases.
But investment advisers aren't turning clients away from dividend plays on a wholesale level, nor do they believe the latest trend in cuts represents the beginning of the end for stock dividends. Rather, they think the current environment will produce some very high yields, and investors that do their homework can still profit.
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"The dividend component of total returns is something that should still be viewed as a very valuable part of a portfolio by investors," says Chris Armbruster, senior research analyst at Al Frank Asset Management in Laguna Beach, Calif. "We're getting to the point now where you have companies that have accidentally high yields, not necessarily that they set out to be a high-yielding type of company. But with a sharp (stock) price decline they turned out to be a good investment."
Some of the main titans of the stock market have recently announced dramatic dividend cuts.
CNBC.-com parent General Electric (NYSE: GE) last week said it was cutting its dividend for the first time in 71 years, to 10 cents from 31 cents.
In the ensuing days several other financials followed suit, with PNC Financial (NYSE: PNC) and HSBC (NYSE: HBC) announcing major cuts this week, while JPMorgan Chase (NYSE: JPM) also has slashed its dividend.
The moves have left some investors wondering whether the days of big dividend plays are over, at least until stocks come out of their secular bear market.
But market pros say dividends will continue as an enticement for investors, who nevertheless will need to be careful which companies to choose and should resist the temptation to shop for rates alone.
"Look for companies that don't pay an enormous part of their profit in dividend returns and have a business that's reasonably insulated or dynamic enough to withstand an inflationary environment," Armbruster says. "Investing in dividend returns is still a very attractive way to approach the current market."
"It cannot be the only metric you use for searching for companies," adds Peter Miralles, president of Atlanta Wealth Consultants. "You've got to look at the debt-to-equity ratios, the industries that they're in. There's probably going to be some banks that actually make it. We don't know which ones. At the right prices, there's some incredible opportunities out there."
In fact, Miralles and others think this actually could be a good time to cut dividends, and a good sign that the company is preparing itself to go forward.
Some companies are using the bad-news environment to employ measures, including mass layoffs, to clean up their balance sheets and prepare for when the market recovers.
"It does make sense to cut the dividend here," Miralles says. "This is when you can get away with it. You couldn't get away with it six months or a year ago. They'd think something was stinking to high heaven."
Indeed, while investors broadly have reacted negatively to announcements of dividend cuts, some are taking the opportunity to weigh what companies will survive the recession and move forward.
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"We have so many irrational investors in the marketplace today," says Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "Anything that's going to cause a person to contract--going down in the dividend, that goes against the American dream. ... They're not making decisions logically."
Casserly maintains that dividend plays are "one of the best criteria that you could use in this environment" for investing strategies, while Armbruster says investors that can pick selected stocks across varied sectors can do well here.
Among the dividend-paying stocks he likes are Verizon (NYSE: VZ), Philip Morris International (NYSE: PM), Eli Lilly (NYSE: LLY), Chevron (NYSE: CVX) and Microsoft (NASDAQ: MSFT)--all companies paying nice dividends who aren't doing so out of desperation.
"It's important to distinguish between companies that just have a high dividend--you can't just look at a yield on a piece of paper and expect it to continue into perpetuity," Armbruster says. "Anything that has a double-digit yield you have a look at a little bit skeptically. Look at the company and decide if they have the ability to continue paying that."
With the proper amount of caution, dividend plays can provide investors with at least some shelter amid the continuing storm.
"People who are having problems with the dividend strategy are the ones who didn't diversify their risk," Casserly says. "I do think long run it's a good strategy."For more stories from CNBC, go to cnbc.com.