For a very clear example of why dividends matter, consider the case of canadian pharmacies not requiring prescription Prospect Capital (PSEC). I first purchased Prospect in late 2014, believing it to be cheap at the time and that the risk of a dividend cut was overstated.
Well, it turns out I was wrong about the dividend. Shortly after I bought it, Prospect slashed its dividend by 25%. Predictably, the price took a tumble, but I decided to give the position a little more time. The yield was high even after the cut, and the stock traded below book value.
Adjusted for dividends paid, Prospect Capital is up about 15% from my original purchase price. That’s by no means a great return (the S&P 500 is up about 22% over the same period). And I haven’t taken into account tax effects. But it does make the power of dividends abundantly clear. After dividends paid, a disappointing loser becomes a respectable winner.
Disclosures: Long PSEC.