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Dividends are back, and the reasons go deeper than you may realize.

Gail Dudack, chief investment strategist of SunGard Institutional Brokerage, made the case for dividends on our program recently, as did Francois Trahan, chief strategist for Bear Stearns. Dudack pointed out that in this dismal year for stocks, the dividend-paying companies in the S&P 500 have far outperformed the non-dividend-payers. Although she didn't mention the fact, the same is true over the past 20 years.

Those statistics are a big kick in the pants to the world's economists, who have pointed out for years that paying dividends is dumb. Dividends get paid out of a company's after-tax income, and then shareholders have to pay income tax upon receiving them. A company's shareholders are much better off, they say, when the company retains that money in the business, reinvesting it in projects that make the stock price go up. The money compounds, as it were, tax-free, and when a shareholder sells, he realizes a capital gain, on which the tax is lower. If you do the math, you'll find that it works.

The trouble is, the real world is telling a different story.

The reality seems to be that paying a dividend imposes financial discipline on a company. Management wants to keep sending out those checks every quarter -- suddenly to stop paying a dividend tends to be disastrous for a stock, so they make very sure they've got the cash on hand. Big, risky projects generally aren't for them, though carefully considered risks remain a must.

From the investor's point of view, dividend-payers are attractive for the obvious reason that, barring big trouble, they provide a steady, if modest, yield regardless of what happens to the stock price.

In light of those advantages, it may be surprising to learn that dividends went decidedly out of fashion over the past 20 years. Back in 1980, 90 percent of S&P 500 companies paid dividends. Today only about 70 percent do. And back then their dividend yield -- simply the annual dividend payment divided by the stock price -- averaged more than 6 percent. Last year it was just 1.4 percent.

Why did companies repudiate dividends so emphatically? One reason is that many managers bought the economists' argument against dividends. As I say, it does make sense. Virtually none of the technology companies launched over the past 20 years has ever paid a dividend.

But there's another reason, and it just goes to show how unexpected the connections between events can be. One of the largest corporate trends of the past 20 years, and especially the past ten years, is the tendency of top management to get paid with stock options. Partly it was a trend set by tech companies that didn't have much cash in their early days and had to offer options instead. Partly it was a result of the 1993 change to the tax code that made executive salaries exceeding $1 million a year non-deductible if it was not performance related. Companies responded by limiting salaries but ladling out huge option grants, which hold many tax and accounting advantages.

When top executives are getting paid mainly in options, they have a strong incentive to make the share price go up and absolutely no incentive to pay out dividends. After all, they get no benefit from those dividend payments -- only the real shareholders do. And so the management at thousands of companies, responding to the incentives they were given, steadily reduced dividend payments.

Now, for a related reason, dividend payments may well increase. Options are in trouble. The public is outraged by CEOs who made huge gains by cashing out their options at the top of the market while continually urging the public to buy shares. At the same time, pressure is mounting for companies to record the options they give employees as an expense on their income statements; though it isn't required, many leading companies (Coca-Cola, Bank One, General Electric) have announced they will do it voluntarily, leaving other companies to explain why they aren't doing it.

With options suddenly a lot less attractive, how will companies pay their top executives now? I've spoken with board members and lawyers about this, and the answer is clear: They'll increasingly hand out restricted stock. These are simply shares the executive owns but may not sell until some future date. A notable feature of restricted stock is that while the executive may not sell the shares, he collects the dividends on them from the moment they're awarded.

Incentives shape behavior in ways intended and unintended. When more companies start paying dividends over the next few years, and dividend-paying companies increase their payouts, they'll give all sorts of reasons about how good it is for the shareholders. But you and I will know the real story.