In the 1990 film “Crazy People,” an advertising executive decides to create a series of truthful ads. One of the funniest ads says, “Volvo—they’re boxy, but they’re good.”
Dividend-paying stocks are like the Volvos of the investing world. They’re not fancy at first glance, but they have a lot going for them when you look deeper under the hood.
Here’s what to know about the past performance of dividend-paying stocks — and what trends may be influential in driving future performance:
The long-term view
Certain public companies return a portion of their profits to shareholders in the form of dividends.
Dividends have played a significant role in the returns that investors have received during the last several decades. Going back to 1960, 85% of the cumulative total return of the S&P 500 Index1 can be attributed to reinvested dividends and the power of compounding as illustrated in the chart below (31% on an average annual basis).
As of Dec. 31, 2023. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market. For illustrative purposes only and is not guaranteed. Data sources: Morningstar and Hartford Funds, January 2024.
How dividends impacted returns by decade
Looking at average stock performance over a longer time frame provides a more granular perspective. From 1940 to 2023, dividend income’s contribution to the total return of the S&P 500 Index averaged 34%. Looking at S&P 500 Index performance on a decade-by-decade basis shows how dividends’ contribution varied greatly from decade to decade.
As of Dec. 31, 2023. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. *Total return for the S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualized return over the decade. For illustrative purposes only and is not guaranteed. Data sources: Morningstar and Hartford Funds, January 2024.
A decade-by-decade breakdown
- During the 1940s, 1960s and 1970s, decades in which total returns were lower than 10%, dividends played a large role in terms of their contribution to total returns.
- During the 1950s, 1980s and 1990s, on the other hand, dividends played a smaller role when average annual total returns for the decade were well into double digits.
- During the 1990s, dividends were de-emphasized. At the time, companies thought they were better able to deploy their capital by reinvesting it in their businesses rather than returning it to shareholders. Significant capital appreciation year in and year out caused investors to shift their attention away from dividends.
- From 2000 to 2009, a period often referred to as the “lost decade,” the S&P 500 Index produced a negative return. Largely due to the dot-com bubble bursting in March 2000, stock investors once again turned to fundamentals such as P/E ratios2 and dividend yields.3
The chart below summarizes the dividend yield for the S&P 500 Index from 1960–2023. According to Yale, the median dividend yield for the entire period was 2.90%, with yields peaking in the 1980s and bottoming in the 2000s. Today, some investors are increasingly seeking to reduce risk in their portfolios by shifting some gains from growth stocks into dividend-paying stocks.
As of Dec. 31, 2023. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. For illustrative purposes only and is not guaranteed. Data sources: Yale and Hartford Funds. January 2024.
The future for dividend investors: 3 trends
Here are three trends that could shape the future performance of dividend-paying stocks:
1. High corporate cash could bode well for dividends
In the aftermath of the financial crisis, corporations began accruing record profits, and their balance sheets swelled as a result. Cash on corporate balance sheets has nearly quadrupled since the early 2000s.4 Corporations can use this excess cash in a variety of ways, such as expanding their businesses or making acquisitions. While these options may be attractive in some environments, during uncertain times some corporations may be more cautious and choose to hold on to their cash in case of another economic downturn. This excess cash could allow businesses with existing dividends to maintain, if not grow, their dividends.
2. Relatively low bond yields could bode well for dividends
Although bond yields have risen, they’re still low relative to historical levels. Dividend-paying stocks may be appealing to many investors who are seeking yield. Retiring baby boomers who are searching for income-producing investments and institutional investors seeking yield may find dividend-paying stocks to be an attractive option.
3. Financial repression and institutional investors
The U.S. Federal Reserve (Fed) held interest rates low in the aftermath of the Great Recession. They attempted to normalize rates from 2015–2018, cut them again in 2019 and 2020. The Fed raised rates multiple times in 2022 and 2023 to stave off inflation; they’re considering rate cuts in 2024.
These low interest rates have been especially problematic for institutional investors over the past decade-plus. How long can a pension plan with an actuarial discount rate of 6% or higher continue to accept 10-year US Treasury Bonds that yield around 4%?
As such, some institutional investors have been increasing their investments in dividend-paying stocks and strategies — an influx that may help bolster their performance. Demand for these investments will only grow if individual investors follow the lead of institutional investors. Since 2008, institutional investors have poured nearly $78 billion into equity-income funds while individual investors have withdrawn nearly $82 billion from them over the same time period.5 It’s not uncommon for institutional investors to be ahead of the general public when it comes to investing, but how long will this striking disparity last?
And while interest rates have risen in the past year, they’re still low by historical standards, which means dividend-paying stocks continue to offer attractive yields relative to many fixed-income asset classes.
Are dividend-paying stocks right for you?
If you choose to invest in dividend-paying stocks, you can potentially profit from any appreciation of the stock itself and could earn money through distributions made to investors. Of course, all stocks are subject to market risk where the price when sold may be less than when purchased, which makes these a riskier overall investment. Additionally, dividend payments are not guaranteed, and the amount, if any, can vary.
Talk to your Ameriprise financial advisor about whether it may be beneficial to incorporate dividend-paying stocks into your portfolio.