Since Election Day last week, the S&P 500 has lost 4.5 percent of its value. And the Dow Jones Utility Index is off more than 5 percent. The Alerian MLP Index, meanwhile, has sunk nearly 10 percent, and some of its component parts are down 20 percent or more.

Worst hit of all have been stocks yielding 8 percent and higher. Even dividend increases haven’t been enough to stem the tide of selling, while generally robust third-quarter results and sanguine outlooks have been ignored.

The reality is this is a market where momentum trumps value, and it has been for some time. Favored stocks can be bid to the stratosphere. But when a sector falls from grace, the selling is usually relentless. And the more investors’ overall level of anxiety grows, the more severe the damage.

It’s easy to see what’s behind this downward momentum in dividend-paying stocks. Friendly overtures between the president and Republicans in Congress for reaching a debt deal are a welcome contrast from summer 2011, when even an agreement to avoid a US government default at times seemed a bridge too far. But politicians’ moves have done little to calm the markets, which is understandable given the stakes if no deal is reached by Jan. 1.

Taxes have become another scary storyline, as it’s increasingly apparent any deal will include higher levies on investors in the top income brackets. Speculation has also risen that master limited partnerships will lose their favored tax status.

Finally, the Romney campaign’s charges that the Obama administration had a hidden second-term regulatory agenda appear to have resonated with some investors. Stocks in industries from coal mining to health care and defense have skidded since the election.

Value, Not Momentum

For some investors, momentum alone is enough reason to buy and sell. That can be a successful strategy for trading. But it’s also extremely easy to get whipsawed out of solid positions on nothing more than a temporary blip, only to watch the stocks rise again.

If you’re investing for income, following momentum can be even more potentially disastrous. First, you’ll always be buying high (i.e., after others bid up the price and reduce the percentage yield). Second, you’ll always be selling low, locking in losses after others have exited. Third, frequent trading means you’ll miss dividend payments on the way. And fourth, you’ll miss out on the appreciation in share price that occurs over time as a company steadily raises dividends.

When a stock does fall, there’s always a reason. The question for income investors, however, isn’t what kind of damage that reason can do in the near term to a stock’s price. It’s whether the reason has anything to do with the underlying health of the company.

The most important lesson of the 2008-09 crash, as I’ve written many times, is dividend-paying stocks do recover from bear market losses, as long as they hold it together as businesses and keep paying dividends. In such cases, the best course is to simply stick it out. And this time around is no different, despite some of the wild action we’re seeing in the markets right now. 

How do you know if a company is coming apart at the seams? The only reliable place to look is operating results, and to that end, third-quarter earnings reports have offered an abundance of data. If a company was supporting its dividend, strengthening its balance sheet and funding its growth plans to that point, we can infer it’s healthy for now.

But the stock market always looks ahead to the future. And the selling we’re seeing now is due to worries that macro events set in motion by the president’s re-election will upset the fortunes of otherwise healthy companies.

That’s a pretty heavy burden of proof. Let’s see if any of the current threats the market is reacting to have that potential, starting with the fiscal cliff.

First, let’s dismiss the idea that Wall Street has any special insight as to what’s going on in Washington. The certitude many analysts felt that there would be no deal on raising the federal debt limit last year is one pretty good example of this famous disconnect. The more convinced the Street becomes that the parties can’t work together, the more likely a deal will be reached.

But let’s suppose there really is a fiscal cliff and that the worst case forecasts of a 4 point drop in gross domestic product (GDP) prove on target. Such a shock could also trigger a tightening of credit conditions in the US, making it more difficult to borrow.

In such an environment, two things would really count for companies. One is reliable revenue, a business that will continue to produce cash flow come what may. The other is a lack of near-term debt maturities, so management can step back from a temporarily frozen credit market and wait for bond buyers to come back.

Both of these criteria are an integral part of every dividend-focused advisory for which I serve as chief investment strategist, from Utility Forecaster and MLP Profits to Australian Edge and Canadian Edge. Even our picks that are more economically sensitive–such as natural resource producers–have safeguards in place to protect revenue streams and little if any debt to refinance in the near term. And as they proved in 2008-09, these essential services companies’ revenue weathers just about anything.

That doesn’t mean a real fiscal cliff won’t trigger more selling in this market. In fact, the longer it takes for Washington to make a deal, the more selling we’re likely to see.

But the companies we own should stay solid inside. That will ensure their stocks’ eventual recovery, even as they keep paying us dividends. And if Washington surprises Wall Street–as it usually does–these stocks will be the first to rally. The fiscal cliff alone won’t blow them up as businesses, any more than the 2008-09 crash did. In fact, they’re arguably stronger and less leveraged now than they were then, which means they’re even less vulnerable than before.

Taxing Matters

Turning to taxes, the threat of a sudden move back to Clinton-era rates on dividends appears to have convinced some that it’s time to bail from dividend-paying stocks. The question is where will they go?

Bonds, money funds, annuities and other income generators are already taxed at full rate. And they yield far less than stocks and by and large don’t increase their payouts either, making them vulnerable to inflation.

There literally is no alternative to dividend-paying stocks for investors who need to live off their portfolios. Moreover, the actual increase in rates for most investors would be relatively little even in a worst case. Tax rates for institutions and retirement accounts–which hold most of the float for these stocks–will not be affected at all.

The strongest argument against a permanent loss of value in dividend-paying stocks if tax rates rise is that there was no rally when rates were lowered in 2003. Rather, any gains in dividend-paying stocks since then have been due to improving fortunes of the underlying companies, and usually dividend growth.

The upshot is any losses sustained now on a panic about tax rates will be quickly overcome once there’s certainty on what a budget deal will look like. That’s good reason to stick with positions now in good companies, as well as to keep your cash handy for lower prices as weaker hands bail out.

As for master limited partnerships (MLP), prospective tax changes are always a risk. Every sector has its risks, which is why no one should overload their portfolio with securities from any one sector.

Good companies will still make money, no matter how they’re taxed. In fact, the example of the former Canadian income trusts shows that they can often pay higher dividends as corporations, provided the underlying companies continue to grow.

If Washington does pass a new tax on MLPs, as Ottawa did with its income trusts, there will no doubt be a selloff in response. The damage, however, may be a lot less than anyone expects, since the selling already appears to have started. More important, so long as the underlying companies stay strong, they’ll recover that lost ground.

Taxing MLPs, however, would net the Treasury no more than $300 million, barely a molecule of water in the proverbial bucket. In fact, by disrupting investment in energy midstream assets needed to bring shale oil, gas and natural gas liquids to market, it would arguably rob the Treasury of tens of billions in future revenue–while leaving America dependent on foreign energy. Beyond those considerations, MLPs have plenty of fans on both sides of the aisle to argue their case.

The bottom line is a new tax on MLPs, whatever the rumor du jour, is still highly unlikely. And by diversifying sectors and focusing on the best MLPs within each sector, investors can feel secure in the knowledge that these securities won’t blow up their portfolio, even if idiocy does prevail among policymakers.

Watching the Watchdogs

Lastly, regulation under the second Obama administration shouldn’t surprise anyone who has looked at the model of the last four years. The Federal Energy Regulatory Commission (FERC) will continue to explore ways to realize its chief objective of tightening oversight of the nation’s power grid. And we could see pressure on allowed return on equity for major power transmission projects.

On the other hand, the current 3-2 Democratic majority on the Commission did approve the two largest mergers in the history of the power industry last year: Exelon (NYSE: EXC)/Constellation Energy and Duke Energy (NYSE: DUK)/Progress Energy. And a statement issued this week is generally supportive of Regional Transmission Operator incentives, though it may lead to lower returns on investment over time, particularly if interest rates stay low.

The Federal Communications Commission (FCC) is likely to continue supporting rivals to the growing dominance of AT&T (NYSE: T) and Verizon Communications (NYSE: VZ). Rivals, however, are still hobbled by the capital spending gap, which will only widen as AT&T converts the rest of its wireline network to broadband.

As for the Environmental Protection Agency (EPA), the so-called war on coal has scared a number of investors out of coal producers and related companies since last week’s vote. Reality, however, will be considerably more benign.

Last year’s rules on carbon dioxide exempted all currently operating coal-fired plants as well as any on the drawing board now. And lost amid the campaign rhetoric was the fact that the Obama Department of Energy has been a major supporter of developing clean coal technology. Plants now under construction by Duke Energy (Indiana) and Southern Company (NYSE: SO) in Mississippi will be up and running in the next couple years, meeting EPA standards on CO2, even if they’re not later retrofitted with carbon capture equipment.

Yes, older coal power plants are going to be shuttered in the Northeast faster than they would have been if Mr. Romney had won the election. And yes mining companies won’t be able to blow the tops off mountains and dump the rock into valleys, as Mr. Romney might have allowed. But coal is far from dead as an energy source in the US, even as usage grows overseas.

The bottom line: The regulatory continuity, targeted tax increases and budget compromise under the Obama administration may not have been what many investors wanted to wake up to on Nov. 7. And this selling may go on as they express those feelings with their portfolios.

But none of these policies portend the end of the world, despite what the recent selloff in dividend-paying stocks might suggest. And so long as our companies continue to build value as businesses, they’ll stay on track to build our wealth–as America gets what will largely be four more years of what we had the previous four.