Diversification achieves two goals. It helps cut risk and actually increases the expected compound return of your portfolio. For these reasons, a certain amount of diversification is recommended even if you expect some what lower returns from the investments purchased for that purpose. Understand the power of dividends to contribute significantly to your total returns over the long run. Your total return from an investment is comprised of capital appreciation and dividend or interest income.
Capital appreciation comes from changes in the price of the investment.
Dividends are quarterly payments to share-holders made by many companies. Most people assume that the bulk of the returns from stock investments comes from capital appreciation. In fact, from 1929 to 1997, the contribution of capital appreciation and dividends to total return was roughly equal, and the percentage contribution from dividends was even greater when measured on an inflation-adjusted basis. Not all stocks pay dividends, and there may be times when you are willing to forego a dividend if a stock looks particularly promising. But dividend-paying stocks can be a powerful addition to your investment arsenal, especially if you reinvest all of your dividends.