When shares tumble, investors often flee to dividend stocks in order to benefit from streams of income, even as valuations plunge.

But this time, there's a glitch: It wasn't just valuations that got hammered in this downturn. The fourth quarter of 2008 was also the worst quarter for dividends since at least 1956, when Standard & Poor's started keeping such records. Indeed, 288 companies slashed dividends in the fourth quarter, a 444% increase from the same period last year.

And for advisors who may look back on all of 2008 hoping for some better, longer-term news, try again. For the full year, Standard & Poor's says that 606 companies cut their dividends, compared with just 110 companies in 2007.

Still, Howard Silverblatt, senior index analyst with Standard & Poor's, sees a silver lining. Despite the large number of dividend cuts, 475 companies increased their dividends in the fourth quarter. Still, he suggests being picky and looking to the future when considering companies' dividend capabilities. "You have to do more homework than last year," he says. In particular, investors should look at earnings and cash flow from current operations to determine whether the company has the ability to continue paying its dividends.

John Snyder, portfolio manager of John Hancock's Sovereign Dividends Performers Strategy, says that a dividend approach is the best bet in a down market. "Companies with increasing dividends are more resilient," he says. "You know the strong balance sheet and cash flow are there because it's real money they're paying out." He favors some financials, including custody banks like State Street and Bank of New York Mellon, because they don't have the issues with toxic credit cards and real estate that other institutions are facing.

Judy Saryan, portfolio manager of the Eaton Vance Dividend Builder Fund, is focusing on companies with low levels of debt and strong cash flow. She favors telecommunications companies, including Vodafone, and utilities, such as German company RWE. On a less traditional front, she likes fast-food giant McDonald's, which has a current yield of 3.4% and increased its dividend by a tasty 32% over the past five years after implementing a strategy of opening fewer stores while focusing on each location's profitability.

Another source of dividend income to get attention lately involves preferred shares. As financial companies are the dominant issuers of preferred shares, the market plunged last October with the avalanche of bank failures. Ironically, there has been a recent surge of interest as the government's move to invest more than $150 billion in U.S. financial institutions in the form of preferred shares. The theory is this: The government will do whatever is necessary to safeguard its investment-and, by extension, any investment in preferreds is safe.

Josh Peters, editor of Morningstar's DividendInvestor, says preferred shares are more attractive now than they have been historically. On the downside, preferred shares tend to have a fixed dividend, so there is limited opportunity for income growth, and the preferred market tends to be less liquid than the market for common shares.

But, overall the main message from the dividend hounds is to be wary of overly generous dividend yields that are mostly the result of depressed stock prices. "This is not the old market; you don't get something for nothing," Silverblatt says. "If someone is giving you a 10% yield there is risk involved. If you can't afford to lose it you shouldn't be in it."