Dividends still rock.

GEORGE Fisher, a salesman and investor in Sagamore Beach, Mass., is financing the college education of three daughters from his stock portfolio.

Fisher's investments have escaped the full force of the recent market slump partly because he focuses on companies that have steadily increased their dividends, which he has reinvested over decades.

This "cash-in-hand" model of stock investing has served investors well in the bear market that has seen the Standard & Poor's 500 Stock Index decline 38 percent since March 2000. Dividends provide a cash return and a safety net when share prices fall.

Dividends were largely disregarded during the past decade as corporate boards largely advocated earnings growth and stock repurchases. The dividend yield on the S&P 500 fell from 5 percent in the late 1980s to 1.65 percent today. Now, in an age of depressed earnings, dividends may be the dividing line between a positive and negative total return.

In an era of questionable earnings statements, dividends represent real profits and herald profit growth. According to a soon-to-be-published study in the Financial Analysts Journal by Robert Arnott, chairman of Pasadena-based First Quadrant Advisers LP. There is an apparent link between earnings growth and dividend payout ratios. These ratios represent a percentage of profits that companies pay to investors as cash dividends.

Arnott and Clifford Asness, partner in a hedge fund run by AQR Capital Management LLC., looked at dividends and earnings of S&P 500 companies.

Studying the period from 1950 through 2001, Arnott and Asness found that companies with the highest dividend-payout ratios generated inflation-adjusted profit growth of 3.2 percent a year versus only 0.7 percent for those with the lowest ratios. Dividends are also the linchpin in a total-return stock strategy, which combines earnings growth and dividend income. "From 1871-2000, dividend yield has provided over 50 percent of the total return to equities," said James Montier of investment banking firm Dresdner Kleinwort Wasserstein. "In a world of small numbers for equity returns, a far greater portion of an investor's total return will stem from the dividend yield."

To emphasize diversification, an essential part of any dividend-oriented portfolio, Fisher picks companies that represent 10 different industries with a minimum of two stocks per industry. Another key is dividend growth, which is the annual percentage increase in a company's dividend.

In a step in the right direction, President Bush suggested cutting the dividend tax in his recent economic summit in Waco, Texas. Ending the double taxation and making it more enticing for corporations to pay dividends may do more than simply reward patient investors: It might just promote corporate honesty. That's because dividends can't be faked, unlike some of the paper profits companies have been trying to pull over on investors.

Cash in hand beats a CEO's promise, or signature to certify financial results, any day.