NEW YORK — Your dividend check is probably in the mail.

While the number of companies slashing or eliminating dividends has increased due to crises in the housing, mortgage and credit markets, a great many others continue these quarterly payouts, and some are even raising them.

Dividend-paying stocks remain a safe and attractive holding for investors seeking relief from the seemingly interminable onslaught of negative economic news. For elderly investors on a fixed income, dividends provide an essential stream of steady income — regardless of the vicissitudes of equity markets.

“A company with a long and consistent history of raising annual dividends is the best defense against a weak economy,” said William Schultz, chief investment officer at McQueen, Ball & Associates Inc., in Bethlehem, Pa. “A solid, dividend-paying policy reflects a financially healthy company that is able to grow its earnings in any and all market environments.”

Howard Kornblue, who once ran a mutual fund for Pilgrim America that focused solely on dividend-paying stocks, also believes such securities will serve beleaguered investors very well in today’s jittery environment.

“We sought out companies that not only raised their dividends annually, but also had strong balance sheets, no significant long-term debt and were engaged in businesses with solid outlooks,” he said.

Scott Schluederberg, a portfolio manager at Hardesty Capital Management, thinks the current environment for dividends is “fantastic,” as long as one holds a reasonably diversified portfolio of dividend-paying stocks.

Look around and you will see a wide array of companies boosting their dividends. Stocks as disparate as Rohm & Haas Co. (ROH), State Street Corp. (STT), Coca-Cola Co. (KO) and Target Corp. (TGT) have all recently hiked these payouts.

Dividend increases come from a broad array of industries, even in these troubled times.

Schultz especially likes two sectors with a plethora of dividend-paying firms: pharmaceuticals and consumer staples.

“There are a substantial number of blue-chip companies in these areas — including Procter & Gamble (PG), Johnson & Johnson (JNJ) and 3M (MMM) — which have rewarded their shareholders with uninterrupted annual dividend increases for almost five decades,” he said. “It all has to do with their ability to generate consistently growing earnings.”

In one of his investment strategies, Schluederberg keeps a basket of stocks called “Trophy Dividend Growers,” comprising blue-chips which pay out a very comfortable portion of their earnings (30% to 50%) as dividends.

“This gives them a good cushion — they can still pay dividends even in the event of an earnings shortfall,” he said. “We also consider earnings expectations. If the payout ratio starts going above, say, 70% of earnings, then we become concerned and consider exiting the position. We want to make sure the dividend is safe.”

In this strategy portfolio, the collective dividend yield is a very robust 5.2% (versus 2.2% for the overall market). Typically, the yield of this strategy is between 3.5% and 4.25%. “Dividends don’t fluctuate the way stock price does,” Schluederberg noted.

His “trophy dividend” growers include Anheuser-Busch Cos. (BUD). “We bought that stock in the upper $40s when it yielded close to 3%,” he said. “Its value was fully realized when InBev acquired it for $70.”

The best dividend-paying industries, Kornblue asserts, are companies engaged in utilities, essential consumer products, health care, pharmaceuticals, energy, food and beverages. “The managements of these companies are eager to maintain their dividends because they know many of their shareholders invest in them primarily for the dividend yield,” he noted.

But some companies can no longer afford the luxury of handing out dividends.

S&P recently reported that 97 publicly-traded companies (of the 7,000 it tracks) cut their dividend in the second quarter, versus just 18 in the year-ago period. This was the largest figure since the second quarter of 1990, when 108 companies reduced their dividend payouts. Moreover, companies posting dividend increases amounted to 455, a 16% drop from the year-ago period.

Kornblue, now senior portfolio manager at Alpha Fiduciary Generational Wealth Management in Scottsdale, Ariz., thinks dividends will become scarcer as the economy continues to falter. As such, to play it safe, he suggests that dividend-seekers completely avoid stocks in a few distressed industries, particularly financial services, auto makers and home building.

Although the phenomenon of high-profile financial services companies — notably Citigroup Inc. (C), Wachovia Corp. (WB) and Washington Mutual Inc. (WM) — reducing or eliminating dividends has grabbed headlines, the scenario in the overall sector isn’t all that dire.

In fact, according to S&P, for the first half of the year, 7.9% of financial issues shaved their dividends (versus 2.9% for non-financials.) More telling, 20.9% of financial stocks actually hiked their dividends. Still, the losses incurred by the unfortunate shareholders of those financial firms that slashed payouts have been enormous — on the order of $13 billion, S&P estimates.

As for financial services stocks that continue to pay dividends, investors should be extremely cautious. Schultz cites US Bancorp (USB), which has faithfully raised its dividend 36 consecutive years, an impressive stretch. “Given the turmoil in the banking industry, we are waiting to see what they do in the fourth quarter,” Schultz noted.

Kornblue also thinks things will get worse for the financial sector, citing the deepening credit crisis, slowing economy and the ever-unfolding mortgage meltdown. Many financial stocks still paying a dividend carry unsustainably high yields, he warns, strongly suggesting dividend cuts are inevitable.

“There’s a lot of uncertainty here, especially among mid-sized banks,” he said. “More shoes may drop as we learn more about the full extent of their exposure to toxic mortgages.”

But not all financials are bad, Schluederberg insists, especially those companies that have diversified operations, have avoided risky acquisitions, or have too much exposure to mortgages. For example, he likes JP Morgan Chase & Co. (JPM), which just posted better-than-expected second-quarter results.

“They are well-positioned to survive the current crisis,” he said. “In fact, they served as the backstop for the Federal Reserve’s Bear Stearns rescue. JPMorgan shares have sold off recently, but I think they can sustain their dividend.”

While some investors crave a high dividend yield, this can sometimes be a misleading concept. A steep dividend yield may simply mean that the stock price has fallen too far, but the company is still dutifully paying its dividend. This often equates to an unsustainable situation, because the company may have weakening internal fundamentals and likely will have to cut or abolish the dividend.

“A high dividend yield does not necessarily mean that the company is healthy and fast-growing, although it depends on each individual case,” Schultz said.

“As investors, we are more interested at the rate of growth of the dividend, not the absolute dividend figure itself.”

Indeed, some industries like utilities and big pharma tend to have high dividend yields, but they are hardly “high-growth” industries.

To avoid high-dividend yield traps, Schluederberg looks at future earnings estimates. “If a company is paying a $1 annual dividend and their earnings are forecast to be $1.05, then that dividend is in jeopardy,” he explained.

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By Palash R. Ghosh
A Dow Jones Newswires Column