Investors have mostly been focused on fast-growing companies that may not be of the highest intrinsic value, but now it’s quality dividend payers’ turn.

“Since the end of the first quarter, large, quality-type names have been outperforming,” said Rick Helm, senior vice president and portfolio manager at Cohen & Steers, a New York City-based global asset manager. “This is not a defensive call. It’s really a change in mindset among most investors.”

The case for investing in quality dividend-paying stocks is well-established. But in the market recovery that followed the 2008-2009 crash, investors had focused largely on what Helm calls lower-quality stocks. While “quality” names briefly outperformed during the second quarter of 2010, the Fed’s second round of quantitative easing helped these lower-quality stocks continue their advance, he said in a recent report.

But at some point in every recovery cycle, higher-risk capital appreciation plays become harder to find, Helm said. It’s then that investment capital typically shifts to companies such as dividend growers that have shown they can thrive in challenging economic environments, and that inflection point has arrived, Helm opines. 

Dividend plays especially make sense at the moment for a number of reasons, Helm argues.

Net cash payouts among S&P 500 companies rose by a record $25.5 billion in the first half of this year, exceeding the total from all of 2010, Helm notes. And the number of companies raising or initiating dividends in the first half rise to 204 from 140 in the first half of 2010.

Cohen & Steers expects continued strong growth in corporate payouts, and it cites strong earnings as one reason. Full-year operating earnings for S&P 500 companies grew 69% from 2008 to 2010, and consensus estimates continue to call for positive growth despite slowing earnings growth, notes Helm. Dividend growth and recovering earnings have gone hand in hand (the financial sector is a notable exception) and further increases are possible, he argues.

Corporate balance sheets remain strong, with debt declining and cash reserves continuing to mount. And payout ratios are at historically low levels, according to Helm. Because dividends have not kept pace with earnings growth, the average payout ratio stands at a record-low of 28%. That makes substantial dividend growth likely over the next few years, he says.