Dividend stocks can play a very interesting role in a portfolio. Companies that pay dividends typically have achieved a degree of stability in their business. Consistent profits make it easier to return money to shareholders. Also companies that are growing rapidly can better satisfy shareholders by reinvesting profits.

One of the most fundamental questions of portfolio management, is how much to allocate to equities and how much to fixed income. While dividend stocks don't pay income as strictly as bonds, there is a still high degree of regularity. Generally, dividend stocks are counted as equities in a portfolio despite regular income. The income can be viewed as an automatic sale of the value of the business. However, I think it's fair to count them as 50% equities, 50% fixed-income.

An ideal portfolio for a client of mine would be stocks that grow like crazy and then become dividend stocks right when the client is ready retire. The portfolio would provide retirement income, as well as upside protection against inflation. Of course, this is easier said than done because growth is basically impossible to predict over the long-term.

When returning money to shareholders, dividends aren't as tax-efficient as stock buybacks. Both policies represent the distribution of profits to a company's owners. But dividends are taxed every year, while buybacks can benefit long-term shareholders. This is because the gains are only taxed when shareholders sell, allowing the profit distribution to compound without tax friction.

Dividend stocks are still stocks, and business prospects can and do change significantly. Some companies must cut their dividend in response to economic weakness. Also, since dividend payers are stable businesses, they won't grow as quickly as others. Finally, higher interest rates are a particular risk for dividends. With higher interest rates, investors can achieve higher yield with lower risk.