When it comes to stocks, income investors are mostly interested in dividends.

Earnings and valuation don't matter much, unless they impact the sustainability of a company's dividend. For instance, an income stock that cuts its dividend is a killer to our portfolio value.

Value investors often sneer at us, claiming that dividends are irrelevant to the true long-term valuation of their investments. Yet in a world of funny accounting and high P/E ratios, the solid virtue of our income streams may give us the last laugh…

Funny Accounting and Spurious Profits

Value investors traditionally look for companies selling at low P/E ratios and discounts to their net asset values. Unfortunately, modern derivatives techniques and accounting conventions make this approach much less useful than in days past.

This is especially true for natural resource companies. You see, technically speaking, these companies should hedge their product sales price forward. The problem is that, unless the hedges all expire each quarter, a period of declining prices could produce an immense (and spurious) profit that reflects nothing in cash and occurs even as the company's value has declined.

The oil production master limited partnership (MLP), Linn Energy (LINE), for example, showed a huge profit in the final quarter of 1988, even though the value of its reserves had declined with the price of oil. A similar outcome is likely in the first quarter of 2015.

In reality, declining oil prices are very damaging to LINE's business – so much so that the company recently slashed its dividend payout from a forecast $2.90 per unit to just $1.25 in 2015. Of course, Wall Street Daily readers weren't surprised, as my colleague, Alan Gula, had predicted the dividend cut in his Dividend Death Watch.

Finally, it's the dividend cut – not the company's quarterly earnings – that will be the best indicator of LINE's fortunes. The quarterly earnings report will likely only reflect the success of LINE's price hedging. Meanwhile, the stock has halved in the last six months, which mirrors the declining value of the company's oil reserves.