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When you think about stocks, you remember the times when stock indexes hit record highs – as the S&P/TSX composite index did this week, pushing through the 15,000 level. But long-term investors make most of their money from dividends – not from capital gains when stock prices go up.

In a 2002 book, Triumph of the Optimists: 101 Years of Global Investment Returns, the authors looked at stock returns in the United States and Britain.

While year-to-year performance was driven by capital appreciation, they said, long-term returns were largely driven by reinvested dividends.

In fact, a market-oriented portfolio that included reinvested dividends would have generated nearly 85 times the wealth generated by the same portfolio relying solely on capital gains.

Tweedy Browne, a well-known value investing firm, used such research to show the advantage you get investing in high-yield dividend stocks over long periods.

(You can find the study at www.tweedy.com)

"The ability to pay cash dividends is a positive factor in assessing the underlying health of a company and the quality of its earnings," said the New York-based money manager.

"This is particularly pertinent in light of the complexity of corporate accounting and numerous recent examples of ‘earnings management,’ including occasionally fraudulent earnings manipulation."

A portfolio of high-yield blue-chip securities may be just what you need if you’re a long-term investor – and if you’re not looking to see your money double within a few weeks.

Tony Demarin, president of BCV Asset Management in Winnipeg, is a big believer in buying high-quality dividend-paying stocks, such as Canadian banks, utilities, pipelines and insurance companies.

"We don’t entertain our clients with this strategy," he said. "It’s a boring way to make money."

If you invest in dividend stocks, you won’t be boasting to your friends about your gigantic gains. But you can take comfort from the fact that your portfolio won’t plunge precipitously, either http://paydayintime.com.

Companies that have a history of paying out earnings to shareholders – and raising their dividends – tend to see their stock prices follow suit.

Here’s an example. Fortis Inc., based in St. Johns, Nfld., is Canada’s largest investor-owned utility, serving almost two million gas and electricity customers.

Fortis has a long history of raising its dividends. It hasn’t missed a year since 1974.

Meanwhile, investors who held Fortis common shares from 1987 to 2007 saw the price go up six times (from $4.75 to $28.99). This reflects a four-for-one stock split in October 2005.

"Let’s face it. The greatest risk to people as they retire is inflation risk, otherwise known as purchasing power risk," says Demarin.

"It’s the cruelest tax of all."

But once you’re retired and living on your dividends – instead of reinvesting them – you’ll be thrilled to get a raise in your income every year.

Demarin is a chartered financial analyst, managing family portfolios of $250,000 and up. I asked him to suggest a diversified Canadian blue-chip dividend portfolio for someone with $50,000 to invest.

He recommended buying 10 stocks and holding $5,000 in each one.

• Two banks: Toronto Dominion Bank and Bank of Nova Scotia.
• Two life insurance companies: Manulife Financial and Sun Life Financial.
• A financial-services holding company: Power Financial Corp.
• Two oil companies: Imperial Oil and Husky Energy.
• A utility: Fortis Inc.
• A pipeline company: Enbridge Inc.
• A railroad: Canadian National Railway Co.

So, what kind of return can you expect from such a portfolio?

If you hold it for a period of three to five years, you should get a 10 per cent compound annual average return before tax, he said.

Next week, we’ll look at mutual funds and exchange-traded funds that specialize in dividend investing.

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