CHICAGO (AP) — Dividend stocks haven't had this bad a year in, well, forever.

Publicly traded companies reduced dividends a record 617 times in the first six months, with even relatively healthy companies slashing them under pressure from a bad economy. That outnumbered the number of dividend increases — there were 516 in the period — for the first time since at least 1956 when Standard & Poor's records start.

That doesn't mean investors should give up on them.

Dividend devotees like Lew Hoffman certainly aren't. The Oklahoma City retiree just sent off a total of $1,000 to buy more shares of a handful of dividend stocks he's been in for decades, such as Coca-Cola Co. and Exxon Mobil Corp. He shrugs off the fact that Pfizer Inc. and some of his bank stocks just cut theirs.

"I'm not really concerned about it," he said. "They'll come back one of these days."

Not every investor is as fearless as the retired flight instructor, who at age 80 still keeps nearly 90 percent of his holdings in stocks. But expert dividend watchers are confident that buying dividend stocks in this harsh environment will prove to be wise even if they have fallen temporarily out of fashion.

"Don't give up on dividends," said Josh Peters, editor of the Morningstar Inc. newsletter DividendInvestor.

"They're going to vary with corporate profitability, because common shareholders are last in line to be paid," he said. "But if you're going to participate in the stock market, which we think most people should, dividends give you the ability to get total return from the company itself as opposed to having to rely on the stock price going up."

The catch is you may have to do more homework to pick them than in the past.

"Picking a dividend stock today is totally different than two years ago," said Howard Silverblatt, senior analyst for S&P. "Two years ago all you had to do was throw your line in and pull one out."

Here are some tips on how to go about selecting them now:

1. LOOK TO DIVIDEND 'ARISTOCRATS' AND BEYOND. When in doubt, it's always wise to go for quality. Companies that have maintained their records of consistent cash dividend payouts through the recession may be a good place to begin.

The list of "dividend aristocrats," members of the S&P 500 that have 25 consecutive years or more of increasing their dividends, is fast shrinking. Six companies — BB&T Corp., Gannett Co., General Electric Co., Pfizer, State Street Corp. and US Bancorp — of the 52 that made the annual list for 2008 have decreased their dividends this year, and at least as many others appear likely to fall off the 2009 list.

You may want to broaden the parameters to consider smaller companies and others with a strong dividend history. Silverblatt suggests as a possible starting point those among the largest 1,500 companies that have paid increasing dividends over the past 10 years, earned twice what they paid out in 2008 and are estimated to make at least twice their current dividend for 2009. As of mid-June, that included 81 companies.

2. SEEK STOCKS WITH HIGH RETURN ON EQUITY. It can pay off to look at your stock candidates' ROE, which is an indicator of quality and cash flow.

Schwab Equity Research reviewed stocks' return on equity from 1990 to early 2009 and found that those in the lowest 20 percent were twice as likely to cut their dividend as all the others. Similarly, those with the highest 20 percent ROE were twice as likely to boost their dividend.

What that means is that stocks with high return on equity are more profitable and likelier to have the cash to cover dividends.

"By looking at the stocks with the highest return on equity, you probably improve your chances of avoiding a dividend cut and of getting a dividend increase," said John Wightkin, director of equity research applications for the equity research team, part of discount broker Charles Schwab & Co.

Return on equity is calculated by dividing a company's net income by its common shareholders' equity.

3. BEWARE OF COMPANIES THAT OVERPAY INVESTORS. It may sound counterintuitive, but don't look for too great a deal.

The lower the payout ratio — the percentage of a firm's profits that is paid out to shareholders in the form of dividends — the safer the dividend is likely to be. Beware when you see companies paying out 70 percent or 80 percent, according to Peters, because it surely can't last.

The same applies to yield. A stock that sells for $30 and pays an annual dividend of $3 per share has a yield, also called dividend yield, of 10 percent. But any double-digit yield on a stock in this market may be too good to be true for the long haul.

The S&P 500 has a current yield of about 2.4 percent, very low by historical standards. Investors should be seeking a stock with a yield of 3, 4 or 5 percent at the moment, according to Peters — not spectacular but able to be grown over the long term.

4. WATCH FOR KEY SIGNALS THIS QUARTER. Doing your homework means keeping an especially close eye on companies over the next couple of months, and perhaps waiting for those signals before buying.

First off, corporate earnings reports, which begin in earnest in mid-July, will provide evidence of whether cash flows are improving yet. So far this year, companies' earnings have gotten better but cash flow has not.

Silverblatt thinks the next thing to watch for will be in the latter part of the quarter when companies start to plan their budgets and expenses for next year. "We think August and September is going to be a key time in the marketplace," he said. "If companies don't see a better 2010, they're going to cut their dividends."

5. BUY BASICS. Since a return to boom times seems unlikely soon, it's a good idea to stick with companies that make essentials in this economy.

"You want to be in things that people need, not that they want — packaged foods, utilities, pipeline stocks, health care," said Peters.

Following all the expert advice is hardly a guarantee of dividend investing success, of course. But true believers in dividends have faith that this period of terrible results will prove to be only a blip in their strong historical performance.

That's why Bob Blanchette, a fellow Oklahoma retiree with Hoffman, is doing his dividend homework with more interest than ever.

"I think this ugly environment provides an excellent opportunity to buy dividend stocks," said Blanchette, 61, of Moore, Okla. "Where else can you get 5 percent yield on your money? If you are an investor and not a trader, then buy value."

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