What is old is new again. Over the years, investors' appetite for dividends has ebbed and flowed. So, what exactly are dividends?

Dividends are the distribution of a portion of a company's earnings, decided by the Board of Directors, to a class of its shareholders. In essence, dividends are tangible evidence that a business' cash flow is real, and that shareholder value is important to management.

Dividend stocks may be suitable in a diversified portfolio for many reasons. Typically, dividend paying companies have outperformed non-dividend paying companies. With so many Baby Boomers getting ready for retirement, or already in retirement, these companies can help them fund their long-term liabilities. Furthermore, investing in companies that have the ability to increase their dividends annually will assist savers and retirees in keeping up with, and possibly outpacing, inflation.

Dividends have historically provided a hedge against the loss of purchasing power - how much your money buys you - because dividend growth has been greater than the rate of inflation. From 1963 to 2013, inflation reduced the purchasing power of 1 dollar to 13 cents, which translates to a 4.14% annual inflation rate.¹ On the other hand, S&P 500 dividends during that 50-year stretch grew at an average rate of 5.58% per year.² For those who may not need the income from their dividends today, the power of dividend reinvestment may potentially assist in higher returns.

For example, consider that $10,000 invested in the S&P 500 from December 31, 1992 to December 31, 2012, without dividend reinvestment, would have grown to just under $33,000.³ Alternatively, if you had reinvested all those dividends during that time period, your $10,000 would have grown to $48,500.⁴ Reinvesting dividends - buying additional shares of stock - is a very easy way to make dividends work harder for you. While the investment landscape has certainly changed over the last five years, the usefulness and applicability of dividends are as apparent now as they have ever been.

Contact a Financial Advisor for more information and to determine if dividend stocks are right for you.