Those companies that are in a position to distribute cash payments to its equity owners are typically companies that have reached a certain size and are able to leverage their critical mass and stability in order to take care of its shareholders. If a company is trying to expand rapidly or finds itself in the middle of a reorganization, it will likely not be able to pay dividends. That rapid growth is good, but it comes at the cost of a sharp increase in risk.

Dividends can clue an investor into the very basic value of the company.

A stock trading below its value is a valuable one to have in a long-term portfolio, and discerning true value via dividends can help investors ferret out those stocks that may be punching below their weight today but show the promise of great gains in the not-to-distant future. A time-tested method of valuing a stock is the Dividend Discount Model, which uses projected company dividends to calculate what shares are actually worth.

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