There are many approaches to equity investing, including conservative ones that may reduce your exposure to market volatility. The goal of conservative stock investing is to achieve long-term growth of capital without experiencing extreme fluctuations that sometimes cause investors to cash out at just the wrong time. The principal hallmark of conservative stock portfolios is an emphasis on established companies with above-average dividend yields or rates of dividend increases. Cutting off the downside is the real power of the conservative approach. The other, a change in the share price, can be positive or negative.
Dividends can be a good indicator of corporate health.
Corporations are not obligated to share their earnings with stockholders, so cash dividends and consistent dividend increases are the most obvious signs of a company's profitability as well as management's assessment of the future. To the extent that rising dividends reflect rising profits, companies that consistently increase their dividends should enjoy rising share prices over time. For investors whose priority is income, dividends have two main advantages. Second and more important, dividends have historically grown faster than inflation over time, as Chart II shows, enabling investors to preserve the buying power of their income. The advantage of a value approach is reducing the risk of overpaying for a stock.