The simplest explanation is that many companies just didn't have to offer dividends in order to get investors to buy their stock. After all, what's an extra 1.2 percent when the market is posting double-digit gains year after year. Well, unless our depleted ozone layer is replaced with laughing gas, the stock market won't post double-digit gains forever. And whenever that happens, dividends are likely to resume a more important role. Indeed, nearly half of the market's 11.4 percent average annual gain between 1926 and 1999 came from reinvested dividends.
Dividends can also offer a clue as to where management thinks a company's earnings are headed.
To understand why, consider what a dividend actually represents. Once a year, a company's board of directors votes to distribute a portion of its profits to shareholders. In doing so, they are, in effect, casting a vote of confidence in the business' long-term earning power. If the outlook is glum, chances are they'll cut the dividend or eliminate it, so the company can use the precious cash for more pressing needs. But if the outlook is good, and even despite any near-term difficulties, they'll vote to maintain or even increase the payout.