The Importance of Dividends Friday, July 11, 1:23 PM ET
Breaking down the concept of investing to the most basic components, there are two ways for an investor to make money: capital gains, and collection of dividends.
If an investor buys a stock that pays no dividend, a capital gain will only occur if some other investor is willing to pay a higher price for that stock in the future. If the purchase price was well timed, the company doesn't dilute shareholders along the way, and the business does well over the course of time, then chances are future investors will be willing to pay a higher price per share to own the same stock. But a phrase we hear often with non-dividend-paying stocks is the notion of the need for a "greater fool," referring to someone else who is willing to pay more for the stock than you did.
But with a dividend paying company, investors need not rely solely upon a "greater fool" to generate a capital gain, and can factor in the ongoing collection of cold hard cash into their analysis of how much money they might make from an investment. Professor Jeremy Siegel of The Wharton School famously showed that throughout most of history, roughly three quarters of the real return from the stock market came from dividends, with only one quarter from capital gains. The conclusion of this analysis is that investors are wise to pay attention to the importance of dividends.
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