The Uses of Dividends
The appeal of a 6 or 7 percent current yield is obvious to someone who is looking for income. But what can we say about a stock with a yield of 1 or 2 percent? Is its dividend useless? As it turns out, a pattern of steady dividend growth, even when yields are low, can be an equally profitable driver of total return.
Ask anyone who's owned Johnson & Johnson for a while. J&J hasn't appeared to be the kind of stock an income investor would grasp at; on average, it provided a current yield of just 2 percent between 1977 and 2007, and even at the stock's lowest price it never offered much more than 4 percent. (See Figure 4.1.) It would be only too easy for a dividend seeker to pass on such a paltry yield, that is, until one checks out what subsequently happened to the dividend.
