The power of dividends has never been so potent. Over the next few years, investing is going to be all about yield.

With uncertainty over the global economy there has been a massive shift in investor sentiment to cash and other income producing investments. Arguably that pendulum has probably swung too far.

During uncertain times, investors tend to shy away from equities markets and head towards the apparent safety of traditional interest bearing investments. But don’t be so hasty.

We know we’ve said it before, but in these uncertain times it is worth shouting it from the roof tops again and again… don’t under estimate the power of dividends.

While most of us follow the fortunes of our share portfolio each day via their share price movements, that dividend payment twice a year often goes unnoticed… it shouldn’t.

Studies in the US show that over a one year period, 80 per cent of share’s return comes from fluctuations in share price. But over a 5-year investment horizon, 80 per cent of a share’s return comes from dividend yield and dividend growth.

The same holds true around the rest of the world. In Europe, since 1970, 80-100 per cent of total share returns have come from dividends. In Japan, share valuations have gone backwards since 1970 while dividends have added an average 2 per cent.

Surprising isn’t it.

With many top 200 companies paying a dividend yield of 4-5 per cent, add the impact of franking credits and that return can jump to an impressive grossed up 7 per cent.

Fully franked dividends are those from companies which have paid the full rate of company tax on their profits. As a result, the share of profits they pay shareholders as a dividend comes with a tax credit equal to the amount of company tax which has been paid to avoid double taxation.

For example, the major banks pay the full 30 per cent company tax on profits so their shareholders receive a dividend with a 30 cents in the dollar tax credit. If a shareholder’s marginal tax rate is less than 30 per cent, then that dividend is tax free.

The 4 major banks currently all have fully franked dividend yields over 5 per cent, and we bet they don’t offer that sort of tax advantaged income return through any of their banking products to customers.

They are attractive returns and a powerful boost to investor returns but it must be acknowledged that dividend yields are a reflection of not only the share of profits a company pays out but also its share price.

As dividends are fixed as a dollar amount twice a year, the percentage dividend yield will obviously go up if the dividend payout stays the same while the share price goes down.

So an investor has to balance up the current attractive dividend yield with the prospects of the individual companies. Is a low share price because the company is in a prolonged slump and may not be able to maintain its dividend payout or is it a short term downturn and the company is strong enough to bounce back and maintain its dividend.

If, in consultation with your broker or financial planner, it’s the latter reason then investing in strong blue chip stocks with good dividend yields can be attractive.

It’s all a question of balance. A good dividend yield from a company producing strong cash flows can provide not only a welcome income stream for investors but also ensure a comforting buffer to a falling share price.

The key is to be selective and look for a strong dividend yield, dividend growth and good cash flow to ensure that dividend can be maintained.

Telstra (dividend yield of 10.18 per cent), Tabcorp (8.61 per cent) and QBE (7.76 per cent) are paying extraordinary dividend yields because their share prices have dropped. They are strong companies but there would be some doubt about their ability to grow their dividend.

The same could be said for the big banks CBA (5.77 per cent), Westpac (5.35 per cent) and NAB (6.29 per cent) who recently warned of a tough couple of years ahead.

But a portfolio can be dividend turbo charged by adding companies which have yield plus dividend growth like CC Amatil (5.6 per cent), Wesfarmers (5.6 per cent) and Toll Holdings (6 per cent).