Right now, the stock market is at a very important point. The third quarter is just about to end and another earnings season will begin. In terms of the main stock market indices, they all seem to be at a crossroads, right on the line of either staying where they are, or breaking down further.

It seems highly unlikely that we’ll see the stock market advance in any meaningful way over the near term. There’s no catalyst or good enough news for institutional investors to pile into stocks, even though they have the money to do so. There is selling going on, as evidenced by the main stock market averages, but equally as important is the absence of buyers. Investor confidence is not very strong at all and Wall Street is reflecting the mood on Main Street.

As I’ve written previously, I don’t feel there’s a lot of action to take in this kind of environment if you’re an equity investor looking to do something. Predicting the future of share prices is a fool’s game, but because the broader market is so well valued and the earnings picture is quite decent, I don’t think we’re going to see a total breakdown. Instead, I expect more range-bound trading around current levels.

With current expectations for the economy and the stock market, it’s no wonder that cash balances are bulging at the seams. Of course, I’m not referring to the bank accounts of individuals, but those of corporations that are afraid to invest with such a cloudy future. Someday, all this cash is going to be put to good use, but the fundamentals for the economy will have to improve first, not the other way around. With corporations unwilling to spend on new plant, equipment and workers, it’s fair to expect zero GDP growth for the rest of the year.

There are good buys in this market due to valuations, but you have to have a long time horizon for investment and you have to have dividends in order to beat inflation. Well-managed companies like PepsiCo, Inc. (NYSE/PEP), E.I. du Pont de Nemours (NYSE/DD) and Johnson & Johnson (NYSE/JNJ) are well off their highs and their dividend yields reflect this. Of course, you can’t expect much as an equity investor, because the economic outlook (even internationally) is so mediocre. Your only return on investment in this kind of market might just be the dividend payment and this begs the question: is it worth investing in equities with all the risks out there and the expectation for little capital gains?

The best strategy going forward is all about protecting yourself with assets that outperform in turbulent times. These include cash, gold, some silver, and very carefully selected dividend-paying, blue-chip stocks. Financial markets can and do get carried away with price extremes. In the end, however, prices of securities come to reflect the underlying value of their assets. Right now, the stock market is trading at a level that reflects current expectations for the economy. Until those expectations change, there’s no rush to do anything.

In the age of austerity, it’s workers who are going to get squeezed. How else are so many large companies reporting excellent earnings? While everyone would like the economy to be at or near full employment, I think the stock market is now settling into the reality of a sustained higher jobless rate. At least right now, big companies would rather return excess cash back to shareholders in the form of dividends, as opposed to investing in new plant, equipment and workers.

Not every big company is doing well right now, but a lot are. The “Windows” sales of Microsoft Corporation (NASDAQ/MSFT) were a little soft, but guess what? It’s a very mature business and not everybody wants to upgrade their PCs right away. Consumers would rather invest in smartphones.

But if the retail technology sector is a little slow, the oil services business is booming. Schlumberger Limited (NYSE/SLB), which is essentially an enormous technology company serving the oil and gas industry, just announced a 64% increase in second-quarter profits and a 62% increase in revenues. Then there’s the railroad company Union Pacific Corporation (NYSE/UNP), which reported record second-quarter earnings of $785 million, up 13.6% on a per-share basis from last year (which is really good considering how mature the railroad industry is). The company reported that five of its six business groups showed good volume growth, with improvement in shipments of agricultural products and chemicals. Quarterly operating revenues grew 16% to $4.9 billion and management expects a solid second half.

One thing I’ve noticed is that the cash hoards of large corporations continue to grow and this is a good sign that dividend payments to stockholders will be on the rise over the coming quarters. In fact, I argue that the current environment is a very good time to be considering new positions in large-cap, dividend-paying securities. We do have the sovereign debt issue hanging over global capital markets. This is an investment risk that’s very serious and isn’t going away. But investors, especially institutional investors, have to put their money somewhere and, as we’ve seen recently, it’s going to go into big companies paying big dividends.

What this trend points to in my view is the continued success of those stocks that are already trading around their price highs. The momentum in this market is with large-caps that have previously gone up. This means that it’s more likely that a stock like International Business Machines Corporation (NYSE/IBM) will appreciate another 20% from its current price high of $185.00 per share than buying a value play and hoping for a 20% recovery.

This is the market we’re in. Good old-fashioned blue-chip investing with a dollop of speculation in commodities should be a decent strategy for the next several years. Dividends are now the stock market’s new best friend.

There are so many companies that you don’t think about investing in, even though it’s likely that you use their products on a regular basis. One such company is The Clorox Company (NYSE/CLX), which is now in the sights of billionaire Carl Icahn. This financier is Clorox’s largest shareholder and he recently initiated a takeover offer for the consumer products company for $80.00 a share. He’s also asking the company’s management to shop itself to the marketplace for a higher bid.

We all know the brand name “Clorox” for its bleach, but what you might not know is that the company also owns other well-known brands like “Kingsford” charcoal, “Glad” garbage bags, “Brita” water containers, “Burt’s Bees” products, “Pine Sol” cleaner…and the list goes on.

Like most large-cap companies, Clorox really hasn’t done much on the stock market over the last 10 years except pay a solid dividend. The stock is currently trading around $75.00 a share with a yield of approximately 3.3%. In year 2000, Clorox’s dividend was $0.82 per share, but it was increased every year to its current level at around $2.10 per share.

If you pull up a long-term stock chart on the company, you’ll find that it was a huge wealth creator for shareholders. From 1995 to 2000, the stock accelerated from $15.00 a share (split adjusted) to over $60.00. That’s an impressive performance for any large-cap stock. At its current level of $75.00 per share, the stock is trading at its all-time high, and one could argue that the company’s share price performance and dividend payments have been very good.

Icahn sees the value in this business and this is why he is trying to buy it for about $11.0 billion. Or rather, he’s trying to get someone else to buy it for more money, thereby generating a nice capital gain for himself.

I think we’re going to see a lot more of these kinds of takeovers for the simple reason that there isn’t a lot of growth in the economy. Therefore, the only way for a big investor to generate any meaningful return on investment is to go out and purchase entire companies. This is what Warren Buffett does and the universe of good businesses that are available to be bought is actually quite small.

Individual investors can’t go out and purchase businesses whole, but they can buy shares in such public companies. I don’t think an equity portfolio should be without several names of well-established, dividend-paying companies. As I see large-caps outperforming over the coming quarters, my research in this sector highlights the impressive capital gains and income one can earn by owning the right large-cap companies.

Stocks are inherently volatile securities. They usually aren’t as prone to the same kind of price swings as commodities, but they have their moments. Institutional investors are going to keep migrating their investment dollars to large-cap, dividend-paying stocks, because they can’t get investment returns anywhere else. It might not be exciting, but it’s likely we’re going to hear a lot more about companies like Clorox over the coming quarters. What’s old is new again and there’s money to be made in these names.

I fully expect large-caps to outperform small-caps this year, as higher raw-material costs will be better absorbed by big companies that have more room to adjust prices without affecting the bottom line. It’s going to be a choppy year for the economy and the stock market, and we could, in fact, get just range-bound trading around current levels. The stock market’s already gone up, and there’s no catalyst as yet for institutional investors to jump on any new bandwagon.

As the main stock-market indices have been trendless over the last several weeks, there has been a noticeable migration to dividend-paying large-caps. As I have noted in previous columns, in the absence of any definable trend, big investors would rather have the income as a way of beating the rate of inflation. I don’t think any major equity investor expects the S&P 500 Index to take off to the upside anytime soon. In fact, Goldman Sachs just cut their year-end target on the Index to 1,450 from 1,500. The Index is currently trading around the 1,330 level, which portends about a nine-percent gain for the rest of the year. If this happens, we would get about a 15% return on the Index for the year, excluding dividends. While the marketplace seems lackluster, that would actually be a very respectable rate of return for the stock market.

Going forward, the broader market will continue to gyrate on the news of the day, but fundamentally, we have to listen to what corporations are saying about their businesses. If there’s one thing we’ve learned over the last several quarters it’s that not all industries are experiencing the same level of economic growth. The uneven performance in the economy is actually holding back investor sentiment, and it’s why there aren’t many lofty calls for higher share prices.

Basically, I think the stock market is fairly valued right now. Investors have taken in all the expectations for recent and future earnings, as well as all the current economic data. The stock market isn’t expensively priced, and it isn’t cheaply priced. It’s fairly valued, which is why there’s consolidation around the current levels.

It’s also fair to conclude that higher commodity prices are trickling down throughout the economy and that they have tempered growth and sentiment. The price of oil, in particular, really seemed to get out of whack with the economic reality of the marketplace. Like the stock market, oil around $100.00 a barrel is fairly valued. It says to me that speculators expect steady growth in demand for the commodity, but nothing too robust.

If we get incremental returns from stocks for the rest of the year, dividend payments will be the key to outperformance. Large-caps have the most to benefit from the current state of the economy, and especially those with strong track records of increasing dividend payments to stockholders.