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Reuters

SAN FRANCISCO (MarketWatch) ? Stock investors no longer have doubts about dividends, and that?s reason for some doubt.

Shares of high-quality, cash-rich, large-cap companies that yield more than the Standard & Poor?s 500-stock index SPX are the new favorites in many portfolios. But many of these success stories have been discovered, boosting share prices and trimming yields.

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At this point, investors might do better scouring the S&P 500 for companies that wouldn?t show up on a screen for above-average yielders, but which still enjoy dominant, ?wide moat? positions in their business.

?It?s kind of a crowded trade,? said Paul Nolte, managing director at investment firm Dearborn Partners, about the popularity of the high-quality dividend strategy. ?Valuations on high-dividend payers are at the upper-end of their historical ranges.?

Indeed, money has cascaded into dividend-focused mutual funds and exchange-traded funds. Dow Jones Select Dividend Index Fund DVY , for example, saw assets grow to around $10 billion from $6 billion a year earlier, according to the ETF Industry Association. Similarly robust asset growth was seen at Vanguard Dividend Appreciation VIG ?and SPDR S&P Dividend SDY .

It?s easy to see why dividends are in demand. They?re an alternative to bonds? paltry payouts, and cushion volatility. Plus, these stocks offer potential for capital appreciation.

Without dividends, the S&P 500 was flat in 2011; including dividends the market returned 2.1%. The yield-rich Dow Jones Industrial Average DJIA ?fared even better, up 5.5%. And the 10 highest-yielding Dow components, the so-called Dogs of the Dow, returned 12.2%.

?Any time we see a big surge in the popularity of dividends in the market, that means prices have been marked up and it?s tough to find bargains,? said Josh Peters, editor of Morningstar?s DividendInvestor newsletter.

Off the beaten path

Owning financially healthy companies that reward shareholders with meaningful income is certainly still a viable investment idea. Large-cap stocks with little or no debt, that pay consistent dividends, and which grow those payouts over time, have been excellent decisions. And 3% or 4% in cash payments every year is nothing to ignore. Read more: How to elude the Fed's attack on savers.

Last year, for example, the average S&P 500 dividend payer gained 1.4%, compared to the average 7.6% decline for non-payers, according to S&P. Performance was even better for S&P?s ?Dividend Aristocrats? ? companies with that have boosted payouts for at least 25 consecutive years, such as AT&T Inc. T , Johnson & Johnson JNJ , McDonald?s Corp. MCD and Procter & Gamble Co. PG . Research S&P's Dividend Aristocrats.

Many investors now are hoping such dividend magic will apply to Apple Inc. AAPL , which earlier this week reported blowout earnings. Apple?s chief financial officer said the company is considering ways to be proactive with a cash hoard approaching $100 billion. Read more: Apple's growth rate will not last.

Apple isn?t paying a dividend, but if it did, the dividend world would spin. ?If Apple came out with a policy that was going to give the stock a yield of 4%, you bet I would look at it,? said Morningstar?s Peters. Read more: Is Apple the cheapest growth stock?

But investing in a company that might pay a dividend isn?t a solid approach; nor is buying the highest yield. Companies in financial trouble often sport unusually fat yields after the shares have taken a beating, and their ability to maintain the dividend is questionable.

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Better to focus on dividend-paying companies in robust financial health, and then consider how that quarterly payment could grow. The dividend might not be terrific now, but a well-run operation with a high return on investment is often the kind of company given to dividend hikes. And dividend investing is a long-term strategy; the goal is to ?clip coupons? year after year.

?Think in terms of what the yield could be, rather than what it is,? said Don Taylor, manager of Franklin Rising Dividends Fund FRDPX .

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