(This was originally published in the October 2016 version of The Dividend Growth Newsletter. It is available here.)
Not only are dividend-paying stocks popular because they can be a source of consistent income, they are also an excellent gauge for a company’s success. Dividends are paid out from retained earnings, and only those that can grow their earnings can afford to pay and raise their dividend each year.
From the issuing company’s point of view, it’s a gesture of gratitude to their shareholders and a way to attract more investment into the company.
A history of consistent and growing dividends is a strong indicator that the company is financially successful; in turn, successful companies make for good investments.
As investors take advantage of these investments, this demand naturally drives up the stock price, further reinforcing the idea that the company is in excellent standing.