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118 Don’t Make Me Say I Told You So

profitable. If a company is not making money, it simply
wouldn’t have the cash on hand to continue to pay dividends

to shareholders. While it doesn’t guarantee the safety of a stock
or mutual fund focused on dividends, it is normally a good

indicator of financial health.

Dividend-paying stocks also tend to hold up better than more

growth-oriented equities in times of market turmoil. When

investors are selling stocks because of fears of market declines,
they will, many times, hold onto the stocks of large, dividend-
paying companies.

First, these stock dividends may be an important source of
income for investors. As mentioned previously, companies that

pay a generous dividend over the course of several years tend

to be large, blue-chip quality stocks that may be more resistant
to market drops than more speculative stocks. Dividends are
typically not affected by drops in the underlying share price.

Additionally, when a company increases its dividend, it may

cause the stock price to increase. As the dividend increases, the
yield on the stock is higher (not taking capital appreciation into

account), and it becomes more attractive to other investors.
As more people buy the stock, the price tends to increase. So

when you own stock in a company that increases its dividend,

Chapter 3: You Must Have Growth In Your Portfolio