Why are dividends so important?

It's the grand ball of financial advisors singing the praises of dividends. Some recommend them as part of their sector rotation. Others promote them as bond substitutes because fixed-income yields have become dismal. With interest rates at record lows, dividends are one of the few sources of income that are worthwhile. While 10-year Treasuries closed 2011 at less than $2%, the average yield on the S&P 500 was $2.08%.

These financial advisors came to the right conclusion, but did they really ask the right question? Here are 10 reasons why dividends matter in any market :

1. In a distressed market, dividends ensure investment stability

While everyone is panicked by the decline in stocks during a recession, dividend investors instead see it as an incredible buying opportunity.

2. Unlike profits, dividends cannot be manipulated or falsified

From an accounting perspective, it is relatively easy to falsify and manipulate income to make it look impressive. However, there is no way to manipulate the income that is paid into your brokerage account.

3. Dividends are a means of immediate and permanent control

Over time, investors see their dividend income grow steadily. You don't have to wait five to ten years to determine if the strategy is working. Each dividend and each dividend increase provides the investor with the assurance that he or she is on the right track.

4. Dividend reinvestment has provided a significant portion of historical stock returns

Performance in any given year is driven by capital appreciation, but over the long term returns are largely the dividend reinvestment result.

Investors should focus on total returns, including both price changes and dividend distributions, not just the price of their funds. By relying on the ubiquitous charts on the web to compare the performance of their investments, Many investors are wrong and yet most don't even know it. These charts typically don't take into account the impact of reinvested dividends on the stocks or the variety of distributions paid by the funds.

Dividends have historically formed a large portion of total stock returns, according to Sam Stovall, chief strategist at S&P Capital IQ. On average since the 1920s, 45% of stock returns came from dividendsBy ignoring dividends, investors are doing themselves a great disservice.

5. Quality companies grow their dividends

You expect your employer to give you a raise every year. Why not expect the same from your investments? S&P 500 companies will increase dividends by an average of 11.5 percent in 2012, Bloomberg forecasts.

6. Spending your dividends in retirement does not harm your initial investment

A good dividend portfolio can thus be passed on to your children and grandchildren.

7. A dividend portfolio requires little maintenance

You'd rather enjoy your retirement peacefully, not spend your time on your wallet and get even more gray hair, right?

8. Dividends help identify well-managed companies

Companies that grow their dividend on a consistent basis tend to be those that have the best financial position and are able to sustain earnings growth.

9. Dividend payers are enduring

Companies that pay a sustainable and growing dividend are more resilient in bear markets. In the disastrous year of 2008, dividend-paying stocks lost an average of $39.1 billion on a total return basis, while non-dividend-paying stocks fell $45.4 billion. The contrast was even starker in 2002, the second worst year of the decade. That year, non-dividend-paying stocks fell $30.3 billion, while dividend-paying stocks fell just $10.9 billion. Large-cap dividend-paying stocks were among the best performers in 2011. Analysts and fund managers say they are positioned for another strong performance in 2012.

In bull markets dividend payers enjoy capital appreciation and growing earnings to support their increasing distributions.

10. Dividend payers are less nervous

Dividend-paying stocks are generally less volatile than non-dividend-paying stocks. Beta is aa way to measure volatility. It indicates how well a security tracks a particular index. A stock with a beta of 1 tends to closely track the S&P 500 Index. With a beta of 1.3 for example it rises or falls by 30% more than the index. With a beta of 0.9 it jumps by 10% less. Over the past five years, the average beta of U.S. dividend stocks was 0.98, while that of others was 1.50. 

Conclusion

Here are 3 companies that have consistently paid dividends through depressions, recessions, world wars, and other political and economic upheavals:

Procter & Gamble (PG) Yield: 3.1% | paying dividends since 1891 | PG is a leader in household and personal care products in more than 180 countries.

UGI Corporation (UGI) Yield: 3.7% | paying dividends since 1895 | UGI distributes propane, gas and electricity.

Consolidated Edison, Inc (ED) Yield: 4.2% | paying dividends since 1895 | ED is an electric and utility company.

Ask the shareholders of these companies why dividends are so high...