There are a lot of die hard dividend investors out there. Many won’t even look at a stock if it doesn’t pay dividends.
There are various reasons as to why this strategy is appealing. Companies that pay dividends are often larger and more stable than non dividend paying companies. If a dividend paying stock’s price gets beaten up, the dividend yield increases making the stock more attractive which means there is a bit of a brake on the price falling. For example if company XYZ is $100 per share and pays annual dividends of $4, it has a 4% dividend yield. If the market tumbles and XYZ is now trading at $50 per share, so long as they maintain their dividend payments, the yield is now 8% ($4 dividends / $50 share price). Many investors would initiate or add to positions in XYZ if they believed the dividend was safe. This extra buying interest can help buoy the stock’s price compared to stocks that don’t pay dividends.
In any case, there are plenty of websites dedicated to dividend based investing. If you want opinions on dividend stocks, there is no shortage.
Instead, here’s a chart that will be sure to be popular with dividend investors and bloggers. It shows the breakdown of S&P 500 Total Returns by decade (including the first four years in the 1920′s) of dividends versus capital appreciation. I circled the last bar on the chart which indicates that capital appreciation accounted for an annualized return of 5.5% between 1926 and 2009. Dividends, however, accounted for 4.1%. Thanks to JP Morgan Asset Management for the chart.
(Click on the chart for a larger version.)