You receive at least your dividends, even if the price of your stock declines. And, over the long term, reinvesting your dividends can provide a bigger base on which your investment earns a return. Dividend Yields Merrill Lynch has found in surveys over the years that investors generally shun dividend yield in favor of capital appreciation during periods of disinflation or deflation. In 1989, for example, half of the respondents in a survey of institutional investors said that dividend yield was a factor in their stock selection process. Ten years later, in the 1999 survey, fewer than 15 percent said dividends were a factor.
Experts cite several reasons for the low dividend yields of the past few years.
A great number of stocks today, particularly small growth stocks, don't pay a dividend. Instead, these companies rely on the prospect of greater than average earnings growth, and an accompanying rise in stock price, to attract investors. In addition, rather than paying out corporate profits in the form of dividends, a company's management often chooses to reinvest gains in the company, or, they may choose to buy back shares of their stock. Before we go any further, let's define the terms yield and total return. A dividend's yield measures the income a stock or mutual fund pays out in relation to its current price.