Rising dividend yields and falling bond yields make dividend stocks winning investments.

The broader market continued to tread water while dividend stocks moved higher during the first few weeks of October. The benchmark S&P 500 Index lost half a percentage point so far this month, and the index is now flat since the start of the year. Dividend stocks largely followed the broader market in early October, with the Dow Jones Select Dividend Index gaining just +0.4% during the first few weeks of the month. However, the Dividend Index has still maintained its lead with a +10% gain in the year-to-date period. The Dow Jones REIT Index made the biggest gains, moving ahead nearly +4% for the first half of the month and enjoying a whopping +14% gain this year.

Dividend payers continue to outpace the broader market.

In the near-term, the market is likely to continue moving sideways as mixed economic data, high oil prices and pre-election uncertainty weigh on investors. Also dragging down the market is a slowdown in earnings growth expected in the next few quarters. 

Third-quarter profits, now being reported, are expected to grow at a slower clip than the prior quarter, breaking a pattern of six straight quarters of higher profits. Looking ahead, research firm Standard and Poor's forecasts 2005 earnings growth of just +9%, down from an estimated +22% average earnings growth in 2004. 

Although the broader market is struggling, investors are being well served by dividend-paying stocks. Dividend payers are delivering market-beating returns and are likely to continue to do so in the months ahead as investors search for safe-haven plays in a volatile market.

Yields on dividend-paying stocks in the S&P 500 climbed from an average 1.78% in January to an average 1.97% in September and now stand above the 2% mark, according to Reuters. Typically, yields rise when prices fall. In this market, however, investors are enjoying the best of both worlds -- rising yields and higher share prices. That's because yields are rising in response to favorable tax reforms and higher dividend payouts -- not lower share prices.

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While dividend yields are rising, yields on low-risk bonds such as Treasury notes or investment-grade bonds are falling. It's not supposed to happen this way, but as the Federal Reserve has been pushing interest rates up, bond yields have been dragged down. The yield on the key 10-year Treasury fell below 4% in May and has barely held above that mark since then. The yield closed at 4.05% on Friday, October 15th. Meanwhile, the average yield on corporate bonds is now at its lowest level in more than two decades, according to credit rating firm Moody's.

While fixed-income yields have fallen in recent months, dividend yields have risen. As a result, dividend-paying stocks now look much more attractive than they have at any time in recent memory. In the coming weeks and months we will take this opportunity to invest in a number of high-quality income stocks with above-average dividend payments.

Dividend yields are rising as bond yields are falling.

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