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.
Total return is a broader measure of a security's performance.
It measures gains realized both through price appreciation and dividend or income distributions. Even when dividend yields are relatively low, such as now, it makes sense to use dividend payouts as a selection criteria for investments. A conservative focus on stocks with attractive dividends can help reduce the effects of volatile markets. Dividends provide a cushion of income and tend not to be as affected by market fluctuations as are stock prices. In addition, reinvesting dividends can make your investment grow substantially through compounding.