These days, it seems there's nowhere to hide.

Just last week, major stock averages fell to levels not seen since 1997, and even sectors that have been considered safe havens are taking it on the chin. As a result, some investors have been turning to stocks that pay a regular dividend, hoping to lock in at least one guaranteed source of income and lower the level of absolute risk.

It's not a bad idea, until you consider that dividend payouts actually exceeded after-tax profits by about $7 billion in the first quarter of 2002. That means that unless profits improve significantly, dividend cuts may be in the offing.

"Corporate profits should advance nicely in the remainder of 2002 despite the equity gloom," said Straszheim Global Advisors, which highlighted the data in a report. "Nevertheless, investors who are becoming more risk-averse, looking for yield instead of growth, may be frustrated."

Payouts Stay Up

Although dividends are currently sitting at historically low levels, payouts have risen 13% from the third quarter of 2000 and are up 8% from a year ago. Meanwhile, corporate profits have declined 27% from their peak in the third quarter of 2000 and are down 17% from a year ago, the research firm said.

During the fourth quarter of last year and the first quarter of 2002, the payout ratio, or dividends paid out as a percentage of after-tax profits, increased to more than 100% for the first time since World War II. From 1980 to 1999, this ratio averaged just 59%, according to Don Straszheim, president of Straszheim Global Advisors. (The figures represent all U.S. companies; for the

S&P 500,

the ratio was 64% in 2001 and is probably somewhat less now given the slight improvement in earnings.)

"The search for yield in a struggling stock market may be a difficult task," he said.

Still, Straszheim noted that dividends have risen in all but 23 of the last 173 quarters (since 1959) and have continued to rise throughout the recession.

Dividends as a Draw

Diane Garnick, chief global strategist at State Street Global Advisors, said dividends are becoming an increasingly useful tool to attract investors' money, and she believes cutting the dividend would actually be counterproductive.

"The companies that have done best over the last two quarters are those dividend-paying companies, and investors have come to rely more and more heavily on dividends," she said.

Indeed, dividend payers in the S&P 500 were up 1.7% for the year through June 12, while non-dividend payers fell 17.6%, according to Arnold Kaufman, senior vice president at Standard & Poor's.

The fact that dividends have not fallen despite a collapse in corporate profits suggests that firms are committed to making those payments and also suggests that there are fewer opportunities out there for companies to re-deploy capital.

"The primary reason that companies have continued to pay out the same dividends with the same increase is to instill confidence in investors," she said. "They're hoping not only to attract people but more importantly not to lose the investor confidence that they already have."

Outpacing Corporate Profits

Salomon Smith Barney strategist Tobias Levkovich said he isn't surprised dividends have outpaced corporate profits recently.

"We had almost no earnings in the first quarter because we wiped them out with one-time charges," he said.

First quarter after-tax profits actually hit $428.9 billion in the first quarter, while dividends amounted to $436 billion, according to Straszheim.

Like Garnick, Levkovich said he expects dividends to become more important to investors over the next few years and he pointed to several companies, including

Citigroup

(C) - Get Report

and

RJR Reynolds

(RJR)

that have recently raised their dividends.

"Today we're getting a 1.6% yield in the S&P 500; that's not particularly exciting, but what are you making in your money market funds? Not a whole lot more, and you don't have appreciation opportunity," he said.

From 1995 through 1999, investors saw compounded annual gains of 25.6% in the S&P 500 on pure price appreciation, but Levkovich said that historically, investors have received almost half of their gains from dividends.

Dividends Looking Up

"Stocks used to be both an income-producing as well as appreciating asset. We lost that in the late '90s, but our sense is that over the next five years they will become income-producing assets

again," he said.

One of the reasons that the dividend yield on the S&P 500 has increased and may well continue to in the future is that technology companies, particularly upstarts that do not pay any dividends at all, have largely fallen off the radar screen.

During the height of the bubble, when technology firms made up about 30% of the S&P 500, the index's dividend yield stood at 0.75%, according to Garnick. Now that those firms have shrunk in size, and now that technology makes up just 15% of the index, the yield has climbed to 1.6%.

Still, some observers remain skeptical that companies will be able to continue distributing such a large percentage of their income to shareholders, particularly if earnings do not bounce back as expected this year.

"

The data suggests that if the economy and earnings do not improve then I think dividends would be clearly be at risk," said Straszheim. "But I do I believe that we have gotten a pretty decent recovery on hand so dividend cuts are not likely to be all that broad."