Even when the market's doing well you should consider companies that make regular payouts. By David Landis, Contributing Editor December 10, 2009 When the market is on a roll nobody seems to care about dividends. But we do. We like companies that have the discipline and the cash flow to make regular quarterly payments to shareholders -- and better yet, to increase them on a regular basis.But in 2009, the two-thirds of the companies in Standard & Poor’s 500-stock index that pay dividends are being clobbered by the remaining third that make no payout. Here’s the score: Dividend-payers are up 21% (including reinvested dividends) through November 30. Non-payers are up 54% over the same period. Don’t get hung up about that big gap in performance, though. If you’re a contrarian, this is a great time to be looking at dividend payers. The same goes if you’re seeking a safe harbor in a market that looks a bit frothy. Goldman Sachs, in a recent report to investors, made a similar argument. “Following a period of economic and financial duress, we argue for added focus and value on companies that grew their dividend in 2009 and have plans to do the same in 2010,” the report says. The Goldman analysts recommended looking at stocks with a dividend yield (annual cash dividend divided by share price) of at least 3% and a free cash flow yield of 5% or better. That’s the free cash flow as a proportion of the share price. This measurement is important because the stronger the free cash flow, the more wherewithal the firm has to maintain and raise its cash dividends. Free cash flow is defined as net income plus depreciation and other cash charges, minus capital expenditures necessary to maintain the business. Advertisement Goldman applied these criteria to companies with a top “buy” rating from its analysts and excluded those that cut their dividends in 2009 or had too much debt. Goldman also used dividend yields based on projected 2010 dividends, but the stocks below already yield 3% or more based on current share prices and dividend levels. Among the best ideas from this screen: AT&T (symbol T). Although the legacy wireline phone business is declining, AT&T generates lots of cash. Goldman expects the free cash flow yield in 2010 to be a whopping 10%. That should make investors feel secure about the $1.64 per share dividend, which, at the December 8 closing price of $27.61, means the stock yields 5.9%. The shares trade at just 12 times projected 2010 earnings of $2.24 per share. McDonald’s (MCD). The burger maker is expected to generate nearly $4 billion in free cash flow in 2010 and return much of it to shareholders in the form of dividends and share buybacks. Analysts forecast a healthy 11% growth in earnings, to $4.41 a share, next year. Goldman forecasts that the dividend, currently $2.20 a share, could rise by 10% in 2010. At $60.61, the shares yield 3.6%. Advertisement Abbott Laboratories (ABT). One of the safest bets among the big pharmaceutical firms, Abbott boasts a solid pipeline of drugs in development, has a blockbuster in Humira, a treatment for rheumatoid arthritis, and faces few patent expirations. Analysts expect 12% earnings growth, to $4.16, in 2010, while the shares, at $53.24, trade at 13 times that figure. With a $1.60-per-share dividend rate, the stock yields 3.0%. Molex (MOLX) manufactures a variety of electronic connectors, sockets and circuit boards that are found in computers, mobile phones and other consumer electronic products. A solid balance sheet, improving growth prospects for 2010 and a 3.0% dividend yield make this stock a good buy at $20.06. Coca-Cola (KO). The soft drink giant, which gets more than 70% of its revenue from outside the U.S., is and will continue to be a big beneficiary of economic growth in emerging markets. A declining dollar will magnify that growth by boosting the part of its earnings attributable to currency gains. Analysts expect 11% earnings growth in 2010, to $3.42 a share. At a price of $57.68, the $1.64-per-share dividend gets you a yield of 2.8%.