There once was a time when investors demanded more from corporate America than just the opportunity to invest in companies with the hope of a return on that investment. They demanded and were given significant dividends. It was not unusual for the dividend yield on the S&P 500 to be greater than the yield on corporate bonds because of the risk that the equity investor was taking. In fact, it wasn’t until 1958 that the US 10-year Treasury Note had a yield that eclipsed the S&P 500’s dividend yield. Why the change?
In 1871, the dividend yield on the S&P 500 was 5.49%. It would remain robust for many years to come peaking at >10% in 1917 and 9.72% in 1931. It wasn’t until 1961 that we first had the S&P dividend yield fall below 3% (2.98%). It wasn’t until 1997 that we had the first dividend yield on the S&P 500 fall below 2%. The yield would subsequently bottom at 1.17% in 1999.
The dividend yield briefly rose to above 3% in 2008, but it has since plummeted to today’s level at 1.28% (9/1/21). Dividends have always played a significant role in the total return of the S&P 500 throughout its history. Furthermore, the level of the dividend yield has been a great predictor of future returns. We all know how the decade of the 2000s performed following the S&P’s lowest dividend yield. What does that suggest for today’s level and the next 10-years?
According to the folks at Advisor Perspectives, for an average holding period of 1 year, dividends accounted for 27% of total returns for the S&P 500 since 1940. Over a 10-year period the contribution of dividends to the total return rises to 48% and with a 20-year holding period dividends account for roughly 60% of total returns. Incredible! Worse than just the decline in the overall dividend yield is the fact that dividends are no longer as sacrosanct as they once were. We witnessed this quite dramatically during the second quarter of 2020 when many companies cut or eliminated their dividends in their response to Covid-19 related events. In fact, only 76% of S&P 500 companies paid a dividend in 2020 compared to 95% in 1980. Given how important dividends are to the total return of the S&P 500 over time, why would you ever elect to invest solely on the potential of an investment and not the certainty of receiving a significant down-payment each and every quarter?