Geraldine Weiss is in the spotlight for her dividend-yielding stock picks.

As growth stocks flourished during the 1990s, many investors dismissed dividend-paying stocks as dinosaurs.

Not anymore. With the bear market trying to end its near-record losing streak at three years, investors have become reacquainted with the key role dividends can play in enhancing long-term total return. Since 1925, about 44% of the Standard & Poor's 500 Stock Index's average annual total return of 10% has come from dividends. Even during the 1990s, dividends accounted for one-fifth of the index's total return.

They also provide a good cushion for defensive investors in a down market. During the first three quarters of 2002, stocks in the S&P 500 that paid dividends were down 17% during the first three quarters of 2002-a formidable drop, but certainly better than the 39% plunge in value for no-yield stocks in the index.

Proposals gaining support in Congress to reduce or eliminate the tax individuals pay on corporate dividends, currently as high as 38.6%, further enhance the outlook for dividend-paying stocks. With more favorable tax treatment, companies might use their excess cash to boost dividends and attract investors rather than buy back their stock or make ill-fated acquisitions.

The new spotlight on an old investment standby comes as no surprise to Geraldine Weiss, editor of the La Jolla, Calif.-based newsletter Investment Quality Trends. Since 1966, when the woman who one publication dubbed "the Grande Dame of Dividends" sent out her first issue, she has promoted the message that while companies can massage their earnings, dividends don't lie. They are, she believes, the best barometer of a company's overall health, its dedication to sharing profits with shareholders and its stock's valuation level.

She shares that philosophy twice a month with her newsletter's subscribers. Since 1986, reports The Hulbert Financial Digest of Annandale, Va., her recommended stocks gained 12.2% annualized through October 31, 2002, beating the 10.9% annualized gain of the Wilshire 5000 Index over the same period. Her picks were 27% less volatile than the index, and her newsletter performed better than each of the 42 others tracked by Hulbert over the period on a risk-adjusted basis. Over the last year, her recommended portfolio has risen 6.5%, compared with a drop of 13.4% for the Wilshire 5000.

Weiss' career as a dividend diva began as a child. "My father told me that he would never buy a stock unless it paid a dividend," she says. "He believed that companies that did not share profits with stockholders in that way were not worth investing in."

When she began looking for a job in the securities industry in 1965, she found that potential employers inevitably ushered her to the secretarial pool. To get in through the back door, she started a newsletter in 1966 with a male partner. While the two sent out identical promotional letters under their respective names, his inevitably received responses while hers were almost always ignored.

After buying out her partner in the late 1960s, she continued sending out the newsletter under the name "G. Weiss." Eventually, Weiss came out of the gender closet when she appeared on Louis Rukeyser's Wall Street Week in the early 1970s. "By that time, my subscribers were making so much money that they really didn't care," she exults.

A Measure Of Value

Subscribers both then and now follow a strategy that diverges from the typical high-income orientation of most dividend hounds. Weiss views the level of a stock's dividend yield not as an income stream, but as a measure of valuation. For that reason, she targets stocks with dividend yields at the high end of their historic ranges, and comparatively low prices. Some of her picks have dividend yields well above the market averages, while others sport below-market yields of 2% or less. What matters is that their dividend yield is relatively low or high for them.

Of the 350 dividend-paying stocks she follows, the 35 she classifies as undervalued represent "buy" candidates that have declined in price enough to so that their dividend yields are at the high end of their historic ranges. To be worthy of purchase, they must also have other favorable characteristics, such as a dividend that is well protected by earnings, a dividend payout ratio high enough to ensure safety and a reasonable debt-to-equity ratio.

Several stocks in the undervalued category meet her dividend-yield criteria, but fail to make the grade in other respects. Even though Eastman Kodak, Fleet Boston, PNC Financial Group and Xcel Energy all have historically high yields, they have all received "dividend in danger" warnings from Weiss.

An unprecedented 49 stocks in her universe have received this red flag, an indication that "they are paying out more in dividends than their earnings would justify. If a company isn't making money, it stands to reason that it will have trouble paying dividends." Usually, Weiss prefers a dividend payout ratio of 50% or less, meaning that no more than half of a company's profit is being paid to shareholders as dividends.

Her "Pick of the Litter" stocks listed in each issue merit "the highest investment consideration." To join this elite group, a stock must be undervalued according to her dividend-yield criteria and have raised its dividends at a compound annual rate of at least 10% over the last 12 years. Its price must not exceed two times book value, and it must sell for 20 times earnings or less. Other criteria include a dividend payout ratio of 50% or less, and debt of 50% or less of total capitalization. Her December 2002 issue lists LSI Industries (LYTS), Royal Caribbean (RCL), Ruddick Corp. (RDK) and Weis Markets (WMK) as the four "Pick of the Litter" stocks meeting these requirements.

When a stock reaches the overvalued range, its dividend yield is historically low and its price unattractively high, she says, and investors should consider a sale. Currently, she classifies as overvalued 87 of the 350 stocks she follows.

Between the undervalued and overvalued are other categories. The stocks in the Rising Trends group have moved up at least 10% from their undervalued levels, and most are rated as "holds." Declining Trends stocks have moved down at least 10% from overvalued levels, but remain unattractive because their prices are at or near the undervalued range.

Real estate investment trusts, usually a staple of dividend lovers' portfolios, rarely appear in the newsletter. "I'm not particularly fond of REITs because they have to pay out 90% of their earnings as dividends," says Weiss. "So dividends can drop quickly if earnings falter." She also avoids bonds with maturities over three years because of interest rate risk.

In addition to using dividend yield as a stock selection tool, Weiss uses it as a market-timing indicator. A low historic yield for market averages such as the Dow Jones Industrial Average is a bearish signal and, as such, may warrant a retrenchment from equities. A higher yield signals undervaluation, and possibly a higher stock allocation.

As a market-timing indicator, however, the newsletter "has had a poor record over the last decade," notes a report by Hulbert. "For much of this period, in fact, it has been strongly bearish."

That bearishness came out in full force during the long 1990s bull market. Before that decade, the Dow's dividend yield had historically fluctuated between extremes of 3%, when Weiss would consider the Dow overvalued, and 6%, which signaled undervaluation.

Because the Dow's yield stayed below 3% during the latter part of the decade, Weiss considered the average overvalued and advised readers to put as much as 70% of their money into cash. The ill-timed move took a particularly hefty toll in 1999, when her newsletter underperformed the Wilshire 5000 by nearly 35 percentage points, according to Hulbert's calculations.

But those numbers are really a "best estimate" because Investment Quality Trends did not specify an asset allocation strategy in every issue. In months the newsletter did not specify an allocation, the Hulbert ranking service kept the portfolio fully invested. As a result, its reported track record may well have benefited from that methodology and from a bull market that Weiss never saw coming.

Still, Weiss says her dividend-yield strategy is as valid as it was when she started her newsletter nearly 37 years ago. Yet she also admits that times have changed and that her parameters, at least when it comes to the market as a whole, might require some fine-tuning. "The yield profile of the Dow has evolved because it has more stocks that pay little or no dividends than it used to," she says. "There could certainly be a new paradigm for the Dow in which a 1.5% yield signals overvaluation and a yield of 3% would mean undervaluation."

Currently, the Dow's dividend yield stands at 2.4%. To become undervalued by Weiss' revised standards, the Dow would need to dive to a groan-inducing 6250.