If you are looking to take advantage of capital growth, it is important to consider all factors that will affect the potential growth of the company. Investing for dividends alone may not necessarily provide a solid indication of the health of the stock. Due to perceived risks, the stock may be marked down by the market. If there are known fundamental problems with the stock, it will trade at a lower price. This will then cause an inflation of the dividend yield and could limit upside capital growth.
Stocks that have a stable price history and regular dividends may be in mature markets with only a small opportunity for earnings growth. While the upside is that the dividend may be relatively stable, the downside is that the company may have limited growth opportunities and share price appreciation. For example, a utility company is stable and they pay regular dividends. However, they have limited upside potential unless they can find ways to extend the growth of the company.
If it is exposure to stock dividends that you are seeking, managed or mutual funds that have mandates for investing in high income producing stocks could prove beneficial. An example of this is the Wisdom Tree Dividend family of funds, in which the funds are weighted according to cash dividends or dividend yields. These particular funds offer protection from bear market environments and provide taxation advantages and opportunity for income generation. Investors can also reinvest dividends to purchase more shares if stock prices fall. Additionally, these funds have exposure to international markets and provide opportunity for knowledgeable investors who have done their research.
Since a dividend reinvestment plan can be used to acquire more shares in a well-performing company, buying stocks for investment dividends can surely be an effective long-term strategy. With the right amount of research completed, you can discover companies that pay consistent dividends and provide a window of opportunity for capital growth.