One way to play dividend stocks for big gains is to identify otherwise healthy companies that have been forced to temporarily cut their dividends due to problems in their business or the broader economy. As investors, mutual funds, hedge funds, and other corporations sell the shares (many, for instance, may only be allowed to invest in companies that pay large cash dividends as part of their investment mandate), the price gets driven lower.
If the underlying company still possesses substantial earning power, however, the Board of Directors will want to restore the dividend as soon as possible.

It may take a few years, but they are likely to want to follow such a course of action. Perhaps there are no better examples than the banks that took TARP funds, a provision of which required them to sign over control over the dividend policy to the United States Government. The result was a drastic reduction in the payout ratio, meaning that bank stocks plummeted as much as 90%.

Some of these banks will fail. Some of these banks will be required to sell so much stock to avoid being closed by their regulators that the common stockholder will be effectively wiped out or be left with a few pennies on the dollar. Some, however, are so strong that they weather the crisis. When the companies have used the cash they saved from the dividend to make up for the losses on their balance sheet, it is likely that many will choose to restore the dividend, perhaps even at its former level.

The result of such a move could be a dramatic upward swing in the stock price as the market adjusts for yield. In other words, if you own a $15 stock that suddenly begins paying a $1.70 dividend, the stock could very well jump to $30 or $35 if comparable securities have 5% dividend yields.

The cause would be income investors, who need money from their portfolio to pay their day-to-day bills, jumping in to take advantage of the higher yield that is now considered safer thanks to the reduced balance sheet problems. (On Wall Street, this is often referred to as a company being able to "earn" their dividends or "cover" their dividends.)

In my own company's portfolios, we have positions in stocks such as General Electric, U.S. Bancorp, and Wells Fargo & Company because we believe that the underlying earning power of these firms will make up for the short-term problems they face. Once those problems have been run-off the books, which may very well take two or three years, we expect the dividends to be restored. Thus, we look at our purchases as effectively "buying" future earnings and cash flows that won't turn on for 24 to 36 months. If we are wrong, we are still happy with the businesses themselves, so we're willing to take that risk.