Not all companies issue dividends. Companies that are experiencing rapid growth (growth stocks) generally do not pay dividends, instead choosing to plow their earnings back into their operations with the hopes of eventually rewarding investors through capital appreciation.
Dividend-issuing stocks typically offer less volatility than do growth stocks, because the dividends they pay are based on the company’s profitability, not market perceptions. In a bear market, this can be especially attractive, as dividend-paying companies may continue to provide a return while other growth-oriented stocks are declining.
Investors who receive dividends can do one of two things with the proceeds – take a cash payment or use the money to purchase more shares. Reinvesting allows investors to increase their position without providing additional capital, reducing the cost basis of the investment. Reinvesting also unlocks the power of compounding, a helpful way for investors to build wealth.