Dividends Key to Making Money

The indexes we quote every day don't tell us the whole picture of just how much stocks have returned to investors. Dividends play a key role in any return a stock generates, and we should really consider dividends when looking at markets, as well. The chart below shows the returns of both the Dow and S&P 500 since the S&P's last record high on October 9, 2007. I've also included the total return indexes, which account for dividends paid by companies in each index.

A regular dividend payment forces management to focus on cash flow instead of throwing money after growth projects. This can keep them more disciplined with investors' money, which generates higher returns. The other reason dividends are so important to investors is that they usually come from established, more value-oriented companies, not high-flying growth stocks. On average, these value dividend stocks will beat out growth stocks long term, which is what Foolish investors should be focused on.

Source: Motley Fool

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