A:

While dividends are the only direct income (money paid out), the total return of holding, a stock is the dividend plus the capital gain of the stock price.

Dividend-paying stocks consist mainly of well-established and mature firms. These companies have grown to a point where they are now leaders in their industries, characterized by having slow but very steady earnings growth. These established companies are mainly concerned with keeping shareholders happy with dividend payments. These companies tend to maintain dividend payments, providing a sense of safety to investors looking to diversify into the equity markets without the high risks of investing in growth companies.

In the past, the market considered non-dividend-paying stocks to be typically growth companies, since expenses from growth initiatives were close to or exceeded their net earnings. This is no longer the rule since a transformation has occurred in today's modern market: firms have decided not to pay dividends under the principle that their reinvestment strategies will, through stock price appreciation, lead to greater returns for the investor. Thus, investors who buy stocks that do not pay dividends prefer to see these companies reinvest their earnings to fund expansion and other projects which they hope will yield greater returns via rising stock price. Although these are generally small- to medium-cap companies, certain large caps have also decided not to pay dividends in the hopes that management can provide greater returns to shareholders through reinvestment.

RELATED FAQS
  1. Why do some companies pay a dividend, while other companies do not?

    Dividends are corporate earnings that companies pass on to their shareholders. There are a number of reasons why a corporation ... Read Answer >>
  2. What types of companies offer the most dividends?

    Find out which types of companies tend to offer the most dividends, and learn why dividends must be considered carefully ... Read Answer >>
  3. Can dividends be paid out monthly?

    Find out if stocks can pay dividends monthly, and learn about the types of companies most likely to do so and how monthly ... Read Answer >>
  4. Which is better a cash dividend or a stock dividend?

    The purpose of dividends is to return wealth back to the shareholders of a company. There are two main types of dividends: ... Read Answer >>
  5. What is the difference between yield and dividend?

    Learn how to differentiate between dividend yield and dividend return, and see why dividend yield is the more popular rate ... Read Answer >>
  6. Why would a stock that pays a large, consistent dividend have less price volatility ...

    To understand the differences in volatility commonly seen in the stock market, we first need to take a clear look at exactly ... Read Answer >>
Related Articles
  1. Investing Basics

    5 Reasons Why Dividends Matter to Investors

    Learn five of the primary reasons why dividends are of significant importance for the overall performance of stock market investments.
  2. Investing Basics

    Best Places to Find High-Dividend Yield Stocks

    Learn about the advantages of stocks with good dividend yields, such as income, stocks in defensive sectors and strong-performing companies.
  3. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  4. Investing Basics

    The Importance of Dividends in Your Portfolio

    Learn some of the primary reasons why dividends constitute a critical factor in the overall performance of a stock investor's portfolio.
  5. Investing Basics

    Reinvesting Dividends Pays in the Long Run

    Find out why dividend reinvestment is one of the easiest ways to grow wealth, including how this tactic can increase your investment income over time.
  6. Investing News

    Understanding How Mutual Funds Pay Dividends

    The process by which mutual fund dividends are calculated, distributed and reported is fairly straightforward in most cases. Here's a look.
  7. Markets

    Due Diligence On Dividends

    Understanding dividends and how they work will help you become a more informed and successful investor.
  8. Investing Basics

    How Dividends Affect Stock Prices

    Find out how dividends affect the price of the underlying stock, the role of market psychology and how to predict price changes after dividend declaration.
  9. Stock Analysis

    The Top 5 Dividend Paying Software Stocks for 2016 (MSFT, INFY)

    Find out which five dividend-paying stocks in the software sector can bring the best yields and growth potential to your portfolio.
  10. Stock Analysis

    The Top 5 Dividend Paying Oil Stocks for 2016

    Discover the top five dividend-paying oil companies for 2016 and what factors contribute to their ability to continue dividend payments.
RELATED TERMS
  1. Dividend

    A distribution of a portion of a company's earnings, decided ...
  2. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends ...
  3. Forward Dividend Yield

    An estimation of a year's dividend expressed as a percentage ...
  4. Capital Dividend

    A type of payment by a firm to its investors that is drawn from ...
  5. Equity Income

    1. Dividend income that is earned through an investment in stocks ...
  6. Indicated Yield

    The dividend yield that a share of stock would return based on ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center