When you invest in stocks, there are primarily two ways to make money.

If you sell the stock at a higher price than you paid for it, then you’ve made a profit through capital gains, the appreciation of the stock price.

The other type of income is dividend income. If you invest in a dividend-paying company, you will receive a regular cash dividend—U.S. corporations usually pay a dividend every quarter.

For taxable accounts, both capital gains and dividend income are taxable. There’s an important distinction: capital gains are not taxable until you sell a stock and realize the gain, whereas dividend income is automatically taxable.

Thus, from the taxation perspective you have control over the timing of realizing capital gains but no control in the case of dividends.

Still, for many investors, dividend income is an important factor when deciding what stock to invest in. Why is that?

Why Many Investors Like Dividends

Conservative investing is particularly a good fit for older investors in retirement or close to retirement. They can’t afford to take on as much risk as younger investors could because they have less time to earn back potential losses through wages or other types of income. In addition, dividends have other benefits.

Since companies pay dividend out of their earnings and cash flow, a consistent and growing dividend policy tends to indicate financial health. However, it’s important to not assume that a strong dividend policy automatically means financial health.

Once a company initiates a dividend policy, management usually wants to avoid reduction or suspension of the payout. Thus, in some cases, a company may be unwisely prioritizing its dividend at the expense of other areas that might more critically need the cash. It is therefore still important to do some due diligence before investing.

If a dividend is considered qualified, it’s taxed a lower rate (no more than 20% even for the richest folks) than short-term capital gains (which can go up to 37%). Generally, if held for at least 61 days, dividend paid by most U.S. companies (and certain qualified foreign companies) qualifies for the lower rate.

On the other hand, in the case of capital gains, an investor needs to hold a stock for at least one year to qualify for the lower long-term capital gains rate—which is the same as the dividend income tax rate. Put another way, you just need to hold a stock for two months to qualify for the lower dividend tax rate while you’d have to hold it for six times longer in order to get the lower capital gains tax rate.

Time Value of Money Comes Into Play

A dividend-paying stock allows you to earn a return before you sell it in the future. Although the stock price adjusts downward for the dividend paid, all else equal, $1 received today is worth more than a $1 gain in the stock in the future.

The reason for that is the time value of money. Cash can be invested and earn a return. Even if you avoid the stock market, you can invest money into Treasury bills, considered to be “riskless” and earn a return. Furthermore, inflation reduces the purchasing power of money over time, so basically the same amount of cash cannot buy as much in the future as it can today.

As long as the company isn’t foolishly paying a dividend when it should be using the cash elsewhere, a dividend is shareholder friendly.

Another way to look at it is that every dollar you get back today is a guaranteed return from your investment. Even if the stock falls sharply in the future, the dividend that you already received is safe.

Dividend-paying stocks also tend to offer more protection during bear markets. When stocks are falling, investors prefer stocks that pay a dependable dividend. These types of companies tend not to be fast growers, but they have relatively less economically sensitive businesses that hold up better during rough times.

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