With hedge fund fellows trying to stamp out volatility like Boy Scouts around a smoldering campfire, it’s a wonder we don’t hear much about dividends these days. Studies show that dividend-paying stocks tend to drop less in down markets and go up less in bull markets. That reduces volatility, but it just may be too old-fashioned an approach for folks who like to opine about portable alphas and Sharpe ratios.

Individual investors, though, seem to be warming to the notion of buying stocks that pay decent dividends. While there hasn’t been a radical response to the Jobs and Growth Tax Relief Reconciliation Act that was passed in May 2003 and which lowered tax rates on dividends, the bill most assuredly has had an impact in the marketplace. An increasing number of companies have responded by raising or initiating dividends, and investors have moved toward plumping up the income portion of their portfolios.

Standard & Poor’s is estimating that the dividend rate on the S&P 500 group of companies will set another record this year, with dividends up 12.4% year-over-year. The number of companies in the index paying a dividend, which totaled 469 in 1980, dropped to just 351 in 2002, but has risen steadily since the laws were changed, and is now back up to 386.

That uptrend is a distinct departure. In 2001, dividends for the S&P 500 fell 3.3%, after a 2.5% decline in 2000 – the first back-to-back falloff since 1970-71. Dividends fell out of favor among managements during the bull market, when shareholders were more likely to be rewarded by stock price gains and share repurchase programs, which helped create capital gains and also facilitated stock option programs that spiraled out of control.

Going back further, it was arguably the reduction of capital gains taxes in 1981 that focused investors so intently on stock price appreciation and ushered in the great bull market. The recent tax change brings back the incentive to buy stocks with yield.

Do investors reward dividend payers? Certainly. Stocks that pay dividends have handily outperformed those that do not. Since 1979, the return on dividend-paying stocks in the S &P 500 has been 15.1% a year, assuming reinvestment of dividends, compared to 12.9% for those that do not. So far this year, payers have outperformed nonpayers 10.7% to 9.9%.

And, a market equity analyst at S&P, Howard Silverblatt, said, “Dividend issues are less volatile than those that don’t pay dividends.”

Why should we be surprised by this? Because knowledge tends to wax and wane, as do investment fads. Just as mankind knew in classical times that the world is round, and then apparently forgot, investors during the great bull market forgot about dividends. Amazingly, S &P reports that since 1926, dividends have contributed nearly 42% of total return to investors.

In fact, the declaration of a dividend was viewed by many growth investors as a bad sign. When Microsoft declared a dividend in 2003, it was viewed with alarm – an indication that management perceived fewer growth opportunities ahead.

These days, with corporations awash in cash and investors still recovering from the losses suffered in growth – aka tech – stocks, paying dividends has caught on again. High time, too, according to Don Schreiber Jr., who along with Gary Stroik manages Wealth Builders Incorporated, an advisory firm in New Jersey. Mr. Schreiber is a big believer in investing in stocks that pay dividends, and with Mr. Stroik he authored a book titled “All About Dividend Investing,” which lays out the case for stocks with yield.

Mr. Schreiber considers this subject extremely relevant today. He projects that the population of retired people will grow from about 35 million today to more than 140 million in the next 20 years. He expects this group to shift its investment focus from growth to income, thus providing a substantial underpinning to yield stocks.

Wealth Builders manages about $200 million, offering a variety of investment styles. The main focus of the firm seems to be keeping clients out of trouble, as well as preparing clients for retirement. “We think every client should have a healthy appreciation of risk,” Mr. Schreiber said. Why does he prefer stocks paying healthy dividends?

“I want a 1,200-horsepower semi-truck pulling me through retirement,” he said, “not a Volkswagen.” For a typical investor on the verge of retirement, Mr. Schreiber probably would recommend a portfolio composed of a mix of stocks and bonds. The stocks are necessary to keep pace with inflation, a threat that Mr. Schreiber sees as real and ongoing.

Where to look for high-yield stocks? Mr. Schreiber lists five promising sectors: natural resources, pharmaceuticals, utilities, financial services, and real estate investment trusts. Of these, he is disposed most favorably toward energy stocks, despite their appreciation this year, and financial services companies. Among energy companies he likes the major oil companies, which are currently selling at about 11 times earnings, considerably cheaper than the S&P 500.

What about the prospect that the sector’s earnings are at an unsustainable level? He thinks Wall Street is valuing the major oil companies based on crude prices of $35 a barrel; he considers oil likely to sell in a range of $45-$55, and that current earnings projections are too low.

Mr. Schreiber considers REITs too expensive, and thinks that Bristol-Myers Squibb (BMY $22.50) is the only drug company offering a reasonable yield (5.1%) as well as a robust product development pipeline.

In the financial services sector, Mr. Schreiber is optimistic that as the Fed starts to back off from further rate increases, the banking stocks will outperform. Specifically, he likes Associated Bancorp (ASBC $33), Bancorpsouth (BXS $22), ING (ING $35), and Barclays (BCS $42). Because international stocks tend to offer higher yields than domestic issues, Mr. Schreiber often has as much as 40% of funds under management in international stocks.

Has Wealth Builders built wealth? Like most managers, it has had varied results, depending on the period under review. The Conservative Wealth Builder program, which invests primarily in equities, is up 4.3% net of fees over the past five years (versus a loss of 15.6% for the S &P 500), and up 96.5% since inception in 1992.As expected, the program tends to underperform in good times and outperform in bad times.

The more aggressive accounts have not fared so well, despite capturing more of the upside in market rallies. The income portfolios, more skewed to bonds, have performed very well – earning a return of 43.2% over the past five years, compared to 39% for the Dow Jones bond index.

And that dratted volatility? Mr. Schreiber’s equity accounts had a standard deviation of between 9.4% and 12.1% over the past five years, comparing favorably to 17.7% for the S &P 500. (Lower is better, in case you just woke up.)

It may not be a semi-truck, but at least Mr. Schreiber appears to be driving an SUV through retirement.