There is an enormous disparity in the performance of dividend paying stocks and non-dividend paying stocks year-to-date. Why is that?

Moroney: The stocks that have done the best since March have been the lowest quality stocks. Stocks with net losses are outperforming the stocks of companies posting profits. And those companies with weak balance sheets are outperforming those with strong balance sheets. This reflects the fact that lower quality stocks were hit hard when the markets declined in March. Those stocks were the most heavily shorted.

So why have those lower quality stocks come back now?

Because recently, investors have had more of a desire to take on risk. Many people were caught with too much cash and decided to buy shares of these companies. It's not surprising for weak stocks to lead after a bear market -- it happened in 2003.

Are there certain sectors of income stocks that have fared worse than others?

The financials are among the very worst and so are utilities, which have a lot of debt. Stocks of these companies did not perform well from January to March and even after the rally, people still didn't want them because they are not the most aggressive stocks. Investors who did buy them -- because they yield 4% or more -- ended up holding stocks whose dividends were then cut substantially -- companies like JP Morgan and Chase. When that happened, the stocks fell.

But you would expect that higher quality stocks would outperform in the long run.

There will be a return to normalcy with higher quality stocks outperforming. But a lot of what happens depends on the course of the economy. If we get a rip-roaring recovery then lower quality stocks should continue to do well as the market recovers. Then, in a more stable market, you would want to buy in higher quality stocks. So the lower the quality of the stock, the more you are betting on strong growth. If the company is unprofitable, with loads of debt it needs huge economic growth for that debt to work out. But if you are getting into stocks such as The Procter & Gamble Company (NYSE: PG) or Johnson & Johnson (NYSE: JNJ), the pace of the recovery is not as central to whether you should buy the stock now.

Keep in the mind that the top one-fifth of S&P 1500 stocks as measured by dividend yield averaged a 12-month return 1.0% below that of the average stock since 1994.

What kind of stocks do you recommend investors buy now?

I hesitate to say that now is time to buy high yielding stocks. Companies that have good dividend growth histories and are fundamentally superior with earnings momentum are in the sweet spot. Look at dividend yields as a sign of strength, but not the reason to buy a stock. For example, when oil was doing really well, Canadian oil partnerships, which offered very high yields, did well. But the reason to buy them was not because they were yielding 12%, but because the price of oil was going up.

So how should an income investor decide what to buy?

My first piece of advice would be to avoid going with the usual suspects. Don't limit yourself to financial stocks or utilities. Look at a number of companies first and determine their prospects. Then, if there is a company you like that is geared to yield, use that as a tiebreaker.

Once a recovery is in full motion, will investors be safer choosing stocks for their yields?

Don't expect a quick change in sentiment. We are not expecting a quick turnaround in dividend payments, especially among financial companies.

So if you have cash, where do you recommend investors put it?

I'm recommending that investors keep 30% in cash as a hedge against market weakness. But I do think that investors willing to take a little risk can put their cash in a short term bond fund like Vanguard Short-Term Investment Grade (VFSTX). Last year was an abysmal year for corporate bonds, but with a yield of 3.9% the fund puts you ahead of cash at a reasonable risk level.

I would also say that investors should revisit their bond holdings. It makes sense to have a diversified portfolio and to have some money there for income especially if it is diversified among different sectors.

Any more ideas?

People come to me and say they need 5% income to live. But I don't buy that. What you need is total return, whether it's through capital appreciation or dividend payment should be irrelevant. In fact, it can be more advantageous to get it through capital gains because you can defer taxes. So make your own income. Instead of looking through a prism of dividend yield, construct a diversified portfolio aimed at total return.

Hopefully, you have done some of that work for us! Can you recommend high yielding stocks with underlying business prospects?

Our top consumer staples picks are retailers Wal-Mart Stores, Inc. (NYSE: WMT), yielding 2.2% and CVS Caremark (NYSE: CVS), yielding 1.0%. I also like British drug maker AstraZeneca (NYSE: AZN). Over the past year it paid $2.05 per share in dividends and the company plans to keep paying a dividend equal to one-third to one-half of earnings, hiking the payout in line with earnings growth.

Another one is General Dynamics Corporation (NYSE: GD) which has grown its quarterly dividend at an annualized rate of 17% over the last five years. Strong operational performance has funded dividend growth, with sales, earnings per share, and free cash flow climbing steadily over the past five years. It trades at less than 10 times trailing earnings, which is way below its five-year average P/E of 17. A return to the historical average P/E could push the stock above $100 by the end of the year. While it does seem that such a gain is unlikely, the stock seems capable of reaching $75 over the next 12 months.

Richard Moroney is the editor of Dow Theory Forecasts.