If you asked a sampling of investors how to compute a stock's total return, you'd probably be surprised by their answers. To most causal investors, a stock's return is measured by the performance of the stock price in a given year. A stock that goes from $5 to $10 has a total return of 100%, right?

Not quite.

A stock's total return has two components - price appreciation and dividends. Of course, for a stock that doesn't pay a dividend, the total return is the same as the price appreciation. But for a stock that pays a dividend, total return is the sum of the dividends plus price appreciation.

Dividends have become the forgotten heroes of many portfolios. Indeed, in recent years, most investors have focused almost exclusively on appreciation and have ignored dividend return. However, dividends still matter, especially if the stock market climate changes for the worse.

Picking stocks based, in part, on dividends is a bit like the "bird-in-hand" adage. Say you buy a stock at the beginning of the year with a yield of 3%. You know that, unless the firm cuts or eliminates the dividend, you are already up 3% in one of the two components that will determine the stock's total return for the year. The 3% cushion provided by the yield (a stock's yield is the annual dividend divided by the current stock price) can prove invaluable during declining market periods and can help to bail out a portfolio's performance.

If you believe dividends matter and you want to own stocks that pay dividends, make sure you focus on a stock's dividend growth, not current yield. Remember - a stock's yield is a proxy for risk. Stocks yielding two or three percentage points above their industry average are probably issues in which the future stream of dividends is in jeopardy. Avoid chasing stocks with high yields. Rather, concentrate on stocks with rapidly-growing dividends, even if the current yield is small. Over a long period of time, that growing stream of dividends can add up to huge gains.

One last point about dividends is worth mentioning. Companies pay dividends every three months. Some companies start the dividend-payment cycle in January; others in February; still others in March. Given the different payment dates, it is possible to structure a portfolio of stocks that pay a dividend every month of the year. This may come in handy if you need monthly dividend income to supplement your other forms of income.