The stock market has dropped, but the dividends haven’t.  Many firms are now paying hefty dividends, tribute to their previous high stock prices but also showing some strength in a time when the markets are hurting.   There are many good reasons to buy a stock with heavy dividends, not only are you protecting yourself from loss in the form of a quarterly or annual payment, you’re also buying a stock that is less likely to be sold off in the event of an untimely stock market downturn.

Buying a stock that pays a dividend not only gives an added boost to returns but protects to the downside.  If a stock pays a dividend of 3%, you can accept a 3% greater downturn than you could with any other investment.  Its practically free money.

The best part about high dividend stocks, though, might not be their dividends at all.  You see, investments are generally graded by their ROI, or the ability to produce profits on a certain amount of expenses or investment.  Few people take the time to consider dividends into their return, we’re more interested in seeing a capital gain of 20% than to see the stock pay a measly 4% every year but that dividend does more than just add to the bottomline.

When the economy moves to the negative, mutual funds, hedge funds and other investment vehicles move money around from one stock to another to keep their heads above water.  Its very simple, rather than invest in technology or the next hot product, conservative investments favor things like toilet paper or toothpaste and bandages.  Regardless of how the economy does, few people are likely to skimp on the necessities.  But there is another critical variable that mutual funds must consider, and that is the dividend.

When gazing at a balance sheet full of hundreds of stocks from large positions to small positions, the manager of the mutual fund is unlikely to cut those businesses that provide the highest dividend.  Dividends reflect a healthy company but also a healthy investment.  When returns are low, the difference between high yeild and no-yield stocks becomes even more apparent.  Why invest in the company without dividends when there are plenty of good investments with a 4-5% dividend?

Mutual fund managers are far more likely to hold onto those investments that give a fixed income to keep the balance of the fund up.  When stock prices are dropping across the board, those companies that pay dividends begin attracting investors who are more interested in hedging their bets than producing out of this world returns.  During economic times like this, high dividend stocks simply garner more demand and thus higher prices are the bidding wars begin.

If you want a safe bet, its in the form of high yield bluechips.  They’ve proven a solid business model and the ability to pay out a cash bonus every few months, so their inclusion in your portfolio is something that must be considered.