Typically, the Street’s conversion to income investing comes after half a decade of powerful profits for everything from bonds to real estate investment trusts (REITs). Even utility stocks--which were battered by an historic meltdown in business fundamentals earlier this decade--have turned in a blistering performance.

There are, of course, powerful long-term factors that should keep income investing on the front burner for years to come. Not the least of these is the rising cost of living, which has become a particularly acute problem for those in retirement or those at the end of their earning years.

The generation of workers that came of age in the glory years of American industrialization in the last century still enjoy substantial pension and medical benefits, paid for by their former employers. But many of these companies are less financially secure than ever, and in fact blame such costs for their plight. Airlines and big automakers are just two of the most notorious industries working overtime to reduce their liability.

As for those of us still in the labor force, only members of Congress, former presidents, CEOs and a handful of other elite professions enjoy such to-the-grave retirement security. For everyone else, how we’ll live in the future depends on how well we save and invest.

THE GROWTH IOU

When you buy a growth stock that pays no yield, you’re essentially taking their IOU for their future success. Back during the late 1990s, this hardly seemed to be a problem with blue chip stocks appreciating 20 percent and more a year, and the Nasdaq doing even better year after year. In fact, the popular financial media was rife with opinion pieces extolling the virtues of a new era of self-controlled savings, and ridiculing the old system of guaranteed pensions.

Many advisors also scorned the strategy of collecting dividends. One who stands out in my memory was H. Bradlee Perry, who went so far as to suggest that even those depending on yield should sell their utilities and other yield-paying investments immediately. His alternative was to buy “growth” mutual funds, selling off a chunk whenever an investor needed cash. Stocks would keep appreciating, he assured, while income plays would languish.

President Bush’s proposal to largely replace the Social Security system with a private savings plan was the logical political equivalent to the philosophy of eschewing the sure thing for supposedly assured growth. The administration argued that giving individuals control over their contributed funds would only allow them to make better returns than the government’s guarantee.

Moreover, it would help free American corporations from the burden of having to provide pensions and other retirement benefits, making them more competitive against foreign rivals.

Of course, as has been painfully demonstrated since, making capital gains in the stock market is anything but a predictable business. We have seen powerful gains in many off their late 2002-early 2003 lows. But many of the stocks counted on in the 1990s to lead a new era of growth--Enron, WorldCom, etc.--have vanished in a puff of smoke. Instead, it’s the tried and true high yielders that have emerged as Wall Street’s darlings. In short, income investors have made back the bear market losses and more, while the stocks offering only IOUs are still very much under water.

I haven’t heard much lately from the advisors who urged retirees to dump income-paying stocks and bonds. But those who foolishly followed along in the belief that stocks could gain 20 percent a year forever are still feeling the pain. Meanwhile, the president’s proposal to overhaul Social Security is decidedly dead. His very promotion of change arguably robbed him of political capital and, in the eyes of many, has left him a lame duck with two and a half years left in his presidency.

THE NATURE OF EXTREMES

As they say in Colorado--which I had the pleasure of visiting last week to speak to American Association of Individual Investor chapters in Boulder and Denver--if you don’t like the weather, wait a minute. The same thing can definitely be said about the US stock market.

We’re currently in one of those periods where investors are more enamored of the bird in hand, i.e. dividends, than of the two birds in the bush, or the potential for capital gains. A stock paying a 10 percent yield is viewed far more favorably than one offering the IOU of even 40 percent annual growth potential.

It’s logical that investors would attach some premium to safety and reliability. In this market, however, the quest for the super yield has trumped even these. Even the most conservative investors are looking to buy the biggest current yield numbers they can find.

One comment I’ve heard over and again from readers is they “don’t have time to wait” for growth. Many now won’t even look at something yielding 5 to 6 percent, even if earnings and dividends are growing explosively. But they will latch onto something with a 10 percent yield, and with far less scrutiny.

In my opinion, this obsession with big current yield numbers--at the exclusion of all else--hasn’t yet become as irrational as the growth craze of the late 1990s. But we’re getting there rapidly. Lost on today’s yield chasers is the fact that high current yields have historically been a warning of higher than average risk. More worrisome still, many have become oblivious even to the fact that a dividend cut will do severe damage to principal.

With the US and global economy humming merrily along at present, the risk of dividend cuts market wide is as low as it’s been in decades.

For example, utilities as a group remain in a debt-slashing and risk-cutting mode. REITs are enjoying a revival of rents for everything from apartments to office buildings. Despite huge and rising levels of debt, actual default rates are well under control, boosting banks. And soaring energy prices have kept energy trusts flush with cash.

Unfortunately, there are still myriad high yield traps for the unwary. And when one is sprung, the result is often wholesale panic in the marketplace, as yield chasers stream for the exits. The fact that many of these buyers had no clear idea of what kind of business was paying the dividends only increases the level of fear and volatility.

That was clearly the case for tanker stocks over the past year.

Business is clearly very strong for this group, with demand for energy soaring globally and supplies stretched thin in all but a very few places. And shipping companies have been extremely generous with their cash flow.

Share price performance, however, has been abysmal since last year’s peak in the group. The primary reason: Many yield chasers who bought them didn’t understand that cash flows are seasonal. They bought in based on seasonally strong cash flows, pushing up prices to extreme levels. Then, when cash flows tapered off during the off-season, many interpreted it as something gone awry and sold en masse.

Selling and falling prices, of course, panicked other investors, who then joined the sellers. And the result was a calamitous crash in a group that remains healthy on the business fundamentals.

Some Canadian oil and gas producers could wind up following the same path. For the past several years, the relentless rise in energy prices has masked a parallel trend of rapidly rising production costs, and even the weakest trusts have been able to hold or even increase distributions.

The first quarter 2006 collapse in natural gas prices was the first shock to this group and has already triggered a dividend cut at gas-heavy trust SHININGBANK (TSX: SHN.UN, OTC: SBKEF). And as long as gas prices remain in the $6 to $7 per million Btu range, there’s the distinct possibility for more price-depressing payout reductions. Damage will get far worse if oil prices should follow gas lower, as many are now predicting.

For those who’ve followed tankers and oil and gas producer trusts as businesses, these cycles are no surprise. The stronger players in both groups will weather the current storm and emerge in even better shape to ride what’s still likely to be several more years of an energy bull market.

As I’ve written many times before, we’re still not seeing anything approaching the conservation, switch to alternatives, new conventional reserve discoveries or slowing economic growth that ultimately broke the commodities bull market of the 1970s. And until we do, energy stocks have a bright future. But again, despite this bullish long-term picture, heedless yield chasers will still be in constant danger of taking a portfolio haircut.

Then there’s the question of interest rates. We’ve already seen a spike up over 5 percent on the benchmark 10-year Treasury note yield, the very threat of which triggered massive though short-lived meltdowns in income investments across the board. Here in May 2006, the market’s reaction to that breakout is decidedly ho-hum. There’s been some selling, but for the most part yield investments are holding firm, including those that took the biggest knocks following rate spikes in summer 2003, spring 2004 and spring 2005.

That’s one reason I expect rates to continue rising further. Others include rising inflation pressures, the slipping US dollar and the fact that the economy has been able to shake off soaring oil prices and higher consumer lending rates.

There’s always a first time for everything. But barring that, it’s inconceivable that we won’t see a real selling wave for yield investors by the time this upward rate cycle reverses. And again, many yield chasers are truly oblivious to the threat.

STAYING PROTECTED

The first step to protecting yourself in this environment is always to buy the business, not the big yield number. Only a solid and growing business makes a dividend secure. In contrast, there’s no guarantee a big number backed by a shaky business won’t be cut, which in turn will drive down principal.

Earnings season is an ideal time to assess the strength of the businesses backing your dividend streams. We’re currently in the middle of first quarter releases. I’ve reviewed those for Utility Forecaster and Personal Finance Income Portfolio picks below for subscribers.

If you’ve been buying strong businesses all along, odds are there won’t be much in this quarter’s slew of reports to warrant a change in your portfolio. In fact, I’ve seen nothing yet for any portfolio picks to indicate weakening, though a couple did fail to meet Wall Street targets.

Among the signs of a healthy and improving business are a rising dividend backed by a low payout ratio (generally 80 percent or lower for most industries), a rising credit rating, solid sales and earnings growth (not including one-time gains or losses or the impact of weather) and a pipeline of projects slated to increase cash flows. All developments of this nature are highlighted in my writeups for each recommendation.

In the first quarter, for example, there were several extremely positive upside surprises, notably at FPL GROUP (NYSE: FPL), where an explosion in power generation profits more than offset a weak quarter at its utility unit.

Growing businesses won’t only avoid disastrous dividend cuts--these positive earnings move belie the conventional wisdom that all high yielding investments get slaughtered when interest rates rise. And growing companies can be found in virtually any industry, so you can be diversified across sectors as well.

Best of all, because this market has been dominated by indiscriminate yield chasers, growing businesses don’t command a premium over other dividend payers. If anything they offer a discount, since investors have bid up prices of high yielders, masking their true risk. You can literally have your cake and eat it too.

THANK YOU, MR. RUKEYSER

On a personal note, I want to express my sympathy for the family of Louis Rukeyser, whom I consider one of the real trailblazers of the investment advisory business. I was a frequent contributing analyst to his Wall Street Winners newsletter, which has the same publisher as my advisories. I was also privileged to speak at no fewer than three of his investment conferences in Las Vegas. The 2001 show was truly a memorable experience for me, on stage at MGM Grand’s main arena in front of 10,000 people.

Mr. Rukeyser was a major force for high standards in the investment newsletter industry, as he was on television for all those years.

That’s a tradition that those of us left in this business are charged to uphold.