Dividend yawn.

THE much-ballyhooed revival of dividends as a stock-market force produced more talk than action this year.

The story was that dividends, shunted aside in the roaring 1990s, were poised for a rebirth after the bear market of 2000-02. If they needed a push, they got a powerful one from a 2003 law that lowered U.S. income tax rates on dividends, putting them on an even footing with capital gains.

The market action that resulted? Not quite what the talk would have led us to expect.

Through the first nine months of this year, according to T. Rowe Price Group, the dividend-paying companies in the Standard & Poor's 500 Index gained 12 percent, less than half the 25 percent return posted by non-dividend payers.

The 200 equity-income stock mutual funds tracked by Bloomberg showed a 23.3 percent average gain for 2003 going into the last week of the year. That stood six points short of the 29.3 percent return for the average of more than 1,500 growth funds.

Shades of 1999, when the non-dividend payers rose six times as much as the dividend payers in the S&P 500. "Investors have not focused on quality in 2003," said Bob Smith, manager of the $5.2 billion T. Rowe Price Growth Stock Fund.

Why not? Simple, many analysts say--it was the first year of a new bull market, and lower-quality stocks almost always get the play in this part of the market cycle.

The appetite for dividends might also have been dulled by a meager menu. At just 1.6 percent, the aggregate yield of the S&P 500 isn't enough to stir up much excitement. Still, that beats money-market yields of 1 percent or less. With interest rates as low as they are, yields of some big-name stocks are quite competitive with bonds.

Note the recent 3.25 percent yield offered by Treasury notes maturing in five years. Put that up against stocks such as ChevronTexaco Corp., lately yielding about 3.5 percent, or Bristol-Myers Squibb, 4.1 percent. In contrast to bonds' fixed interest payments, stocks like those boast a history of dividend increases and the hope of more to come.

All told, reports Standard 8, Poor's Corp., the number of dividend increases in the first three quarters of 2003 was up 15.3 percent from the comparable period of '02.

"Companies are responding to the lower tax rate on dividend income," said Joseph Lisanti, editor-in-chief of S&P's newsletter The Outlook. "Although year-to-date dividend increases are still below the 10-year average, they are the highest we've seen since 1999."

So maybe the great dividend revival has merely been postponed, not canceled. Says Smith, "Quality does matter. We think the market will begin to focus on the quality and durability of earnings--free cash flow and dividends."

In a survey of more than 200 analysts and investors, the Wall Street public relations firm Financial Dynamics says it found "a dramatic increase in the importance of dividends as a factor in the investment decision-making process."

While their ostensible popularity may wax and wane with changing market moods, dividends have long since established themselves as a primary element in stock returns over time. Stocks' ultimate appeal as an investment rests on the claim they represent to a share of a company's earnings. The way that connection gets made is through dividends.

Capital appreciation is just the market's way of anticipating future dividend payments that are made possible by increasing earnings. When you look at it from that standpoint, dividends never go out of style.