"What do you mean, get paid while you wait? A stock with a 4% dividend that falls 25% in price is still a losing proposition."

That's from an email I got recently in response to a post in which I added Ensco (ESV) to my watch list.

That is, of course, absolutely right. A 4% dividend gets wiped out pretty quickly when a stock tumbles in price. Ideally, you'd like to buy dividend stocks that never go down in price and that don't share in market volatility -- except to the upside.

Unfortunately, in my experience, "ideally" doesn't exist. In a down market, dividend stocks tend to go down less than the typical stock -- because they have that dividend yield to support their price -- but they do go down. Dividend stocks can also turn in bad quarters, and when they do, they go down in price. Even stocks with long, uninterrupted histories of never cutting dividends, and even of raising them every quarter, can fall in price.

If you're going to wait until you've found a dividend stock that never goes down, you're never going to buy one. Instead, look for the ones that won't go down permanently.

Today, I'm going to review my 10-stock dividend income portfolio, add a couple of new picks and offer advice on how to avoid losers.

Permanent impairment of capital

If you were going to wait for that ideal income investment that never goes down, you'd never buy a bond, either. Bond prices fluctuate with interest rates, inflation, fear and the credit ratings of the issuer.

What we hope for from a bond is that, despite the fluctuations in price, it will 1) pay the interest promised to buyers and on time, and 2) when the bond matures, it will pay off 100% of its promised maturity value.

Image: Jim Jubak

Jim Jubak

Now, dividend stocks are riskier than bonds. They don't have a maturity date, so they don't carry a promise that you'll get back what you paid on that nonexistent date. By buying a dividend stock, you're signing up for more volatility than you'd get with a bond. Hopefully, you'll also get a higher return than you'd get from a less-risky bond. But you certainly aren't looking for an investment without any volatility.

Indeed, what you're looking for is a stock that pays its promised dividend on time and raises its dividend over time -- and where the stock price doesn't show a permanent impairment of capital.

What's "permanent impairment of capital"? It's what you want to avoid in a dividend stock (and indeed, in any income-investment vehicle). You don't mind if a stock gyrates in value while you hold it, as long as it doesn't go down and stay there. When you need to sell it, you want it to be worth as much or more than you paid for it, so that the yield you earned by owning it isn't wiped out by the drop in capital.

Let me show you what I mean by looking at the stocks in my Dividend Income Portfolio on my Jubak Picks website (registration required) as well as on MSN Money.

It's easier when they go up

Of the 10 stocks in that portfolio, six wouldn't cause a dividend income investor any second thoughts: In the time since I last reviewed this portfolio on May 6, 2011 (or from when I bought them, if I purchased the shares during one of my periodic updates), all six have climbed in price.

Some of the gains were pleasingly hefty. Magellan Midstream Partners (MMP) was up 25.8% from May 6, 2011, through June 29, 2012. Oneok Partners (OKS) was up 31.8%. AmBev (ABV) was up 21.5%.

Some were more modest; although in this market, I'll take modest. General Electric (GE) was up 11.5% from my Feb. 3 purchase through June 29. CPFL Energia (CPL) was up 5.1% from my Sept. 20, 2011, purchase through June 29. Penn Virginia Resource Partners (PVR) eked out a 0.9% gain from May 6, 2011, through June 29, 2012.

In all six of those cases, a dividend investor wouldn't have had to worry about a decline in share price detracting from the yield on the stock. (Just the opposite, in fact, with the gain from price appreciation adding to the income from the dividend.)

Deciding whether stocks in this group were a good or bad income investment during the period is straightforward. You don't have to subtract any losses to capital from the income they generated: the 4.7% yield on Oneok Partners, the 4.8% yield on Magellan Midstream, the 8.5% yield on Penn Virginia and the 6.6% yield on CPFL Energia. Good, straightforward income investments.

In the case of General Electric, with its 3.3% yield as of June 29, and AmBev, with its 3.8% projected yield (because the company pays a dividend only once a year, the trailing 12-month dividend yield can be deceptive), the analysis is equally straightforward. Are the current yields -- and the prospects for increases in company dividends -- high enough to make these good income investments?

In the case of General Electric, which is about to start getting dividends from its financial unit again, I'd say the answer is yes. In the case of AmBev, I'd say the answer is no, and I'm dropping it from this portfolio with this column to replace it with a higher-yielding stock.