Nearly a year ago I turned my back on a longtime love. Shares of GameStop (GME), a chain of videogame shops, had swollen sixfold in price since I first recommended them in August 2004 . I believed then and do now that videogames, with their Hollywood-size production budgets and ever-increasing realism, will continue siphoning attention away from less-interactive media like movies and television. But by last November GameStop fetched 35 times earnings, about double the broad market's price. I judged the stock "worth passing on until you see a price cut."

You've seen a dramatic one. The S&P 500 index has lost 40% since then. GameStop has fallen by half. The decline in its valuation is even more dramatic. Earnings underlying the S&P 500 index have recently shrunk by as much as the index itself, leaving the index's trailing price/earnings ratio little changed. GameStop in its most recent quarter (ended Aug. 2) reported a 162% ballooning of earnings. The stock now sells for 11 times forecast earnings for GameStop's fiscal year ending Feb. 2. What was once double the market's price now sells for some 8% below it.

That's why I'm surprised at my own reluctance to re-embrace the stock now. I expect America's consumer spending to dive once our fellow citizens realize that not all stock and house crashes bounce back in a year, and that their credit is tapped. I think the ability of other countries to flourish while we stall is vastly exaggerated. But a world-wide spending slump isn't my biggest worry on GameStop, for three reasons. First, it dominates the trade in used games, which have lower prices but plumper margins. Second, the relative value of a game -- a $20 movie buys two hours of entertainment while a $50 game can buy months -- might support demand. Third, GameStop stock is sufficiently discounted for yet-to-be-reported bad news; the company could produce well short of the 24% earnings growth analysts are looking for next year and still be a good deal today.

Nor am I overly worried about competition. Wal-Mart Stores (WMT) sell games cheaper than GameStop but lack the wide selection of used games. GameFly rents games by mail a la Netflix (NFLX); $23 a month buys two at a time with unlimited swapping. But the sort of teen that enjoys slaughtering alien reptiles with a chain gun tends not to care much for waiting three days for the mailman.

What bugs me about GameStop is, for example, management's announcement on Oct. 1 that it will spend $700 million to buy Micromania, France's top videogame chain. The price isn't exorbitant, although at an estimated 14 times earnings it's richer than Gamestop's valuation. And the financing is reasonable. GameStop has more than $500 million in cash and can put the rest on a credit line and pay it off in a few months.

The problem is that GameStop pays no dividend. I meant what I wrote Tuesday that, with the possibility of a prolonged down market looming, dividends are no longer just nice to have. They're essential. GameStop's low price/earnings ratio will give me no comfort three years from now if I'm still waiting for it to rise. A fat dividend yield will. And as I pointed out Tuesday, the whole of stock history shows something the past two decades have defied: that most of the long-term returns for stocks come from reinvested dividends, not rising share prices.

I can forgive a young company with blazing growth for skimping on dividends for a while. But I'm unlikely to sweeten on GameStop until it coughs up some cash. That $700 million it's spending could finance a 5% dividend for three years. If shareholders wanted to own a French videogame shop, they could spend their dividends on one. Instead, management has invested for them. Perhaps they think they're running a mutual fund. GameStop has more than 5,500 stores in 16 countries and is expected to clear $1 billion in operating cash between this year and next. It's too mature to keep blowing through cash like a kid. Time for a big-boy strategy of dividends first, acquisitions maybe.

Gamestop turned up on a recent search for midcap stocks with modest valuations. Have a look at all six screen survivors if you like or run your own search using SmartMoney's stock screener and the full list of criteria.