Many investors I spoke to at a three-day investment conference last week extolled the virtues of the dividend stocks they owned. These investors loved how dividend-paying companies seem to just to keep going up, and the dividend money just keeps rolling in.

"It almost seems like a scam," one investor told me. "I do nothing, and the company keeps paying me, quarter after quarter, year after year."

Well, it is not a scam: you are giving your hard-earned capital in exchange for a return in the form of a dividend. Still, it is a pretty sweet deal, especially if you can find a company that continually raises its dividend, such as AutoCanada Inc. (TSX/ACQ), which has raised its dividend 10 separate times since 2010.

With this dividend love-in in mind, let's go back to the basics and outline why dividend-paying stocks are, indeed, very good for your portfolio.

Dividend-growing companies are stellar performers (especially when interest rates rise)

A Ned Davis Research study discovered that the stocks of companies that initiate and raise dividends returned an average of 9.5% annually from 1972 to 2012, compared with 7.2% for non-dividend payers. In other words, you get capital gains plus income. Nice.

Dividends make you reconsider selling a stock

Face it, when it comes time to sell an investment, you know you will almost always choose the one that does not provide regular income as the one that goes first. A dividend stream becomes reliable, expected cash flow, and you never like to let these stocks go.

As a result, you hold dividend-paying stocks longer and are less likely to panic and sell them when the market has hiccups. Both the time in the market and the avoidance of panic selling are certainly good for your portfolio’s returns.

Dividends instill discipline in company management

Knowing that regular dividend payments have to be made every three months, the management of dividend-paying companies know, at the very least, they need to have earnings or cash flow coming in on a consistent basis in order to fund the payout.

Management of these companies is less likely to go off on money-losing tangents, and less likely to engage in empire building on an ill-suited acquisition spree.

Thus, you get regular payments and a management team that has to be a little more cautious.

Dividends can reduce volatility

In tangent with the second point above, dividend payments can make a stock less volatile than it would be otherwise.

Dividends attract a wider audience of investors, and if a certain dividend-paying stock begins to fall, investors seeking high yields will often step in and start buying it, potentially slowing the stock’s fall. Without that dividend, investors have much less incentive to come in and try to establish a floor for the stock.

In the financial crisis, many bank stocks fell to yield levels of 20%, but buyers eventually stepped in, because dividends continued to be paid (indeed, none of the Canadian banks suspended their dividends during that time).

Dividends have a tax advantage

Finally, there is a nice tax advantage in Canada because of the dividend tax credit. The maximum tax rate on dividend income is about 30%, so you can make close to $50,000 if you only have dividend income and actually end up paying nothing in tax.

Being able to relax all day and collect dividends, which boost returns and lower volatility in your portfolio — and having maybe all of your income completely tax-free — makes it easy to see why dividend stocks have quickly become favourites for Canadians.