Dividends play a key role in determining the returns equity investors receive. Investors who buy funds that track the S&P 500 Index can rely on dividends to augment the index’s price performance. Of the 500 large-cap companies in the index, more than 80% pay dividends.
Dividends from companies in the S&P 500 have contributed about 32% of the index’s total return since 1926. Capital appreciation has accounted for the remaining 68%, according to S&P Dow Jones Indices, which administers the S&P 500 and hundreds of other indexes.
But it’s important to note that the S&P 500 index itself does not pay dividends—the companies in the index do. An investor has to buy shares of the companies themselves or of index funds in order to receive dividends.
“The S&P itself does not pay a dividend,” explains Titan investment manager Christopher Seifel. “But the companies held in an ETF, they do flow through the dividends. So you receive a dividend on a pro-rata basis based on the construction of the index, the weights, and the companies that do pay dividends.”
Why do companies pay dividends?
Companies pay dividends to reward stockholders by sharing profits. Stable and increasing dividends signal that a corporation has confidence in its prospects. Investors see dividends as a sign that a company is on solid financial footing and expects a promising future.
Individuals often consider a company’s dividend yield as an incentive for investing. Yield is simply a measure of a company’s annual dividend expressed as a percentage of its current share price. Yields fluctuate as the stock price rises and falls, but in all cases the higher the yield, the better in terms of investment returns. As the yield falls, the investor gets less for their money.
The dividend yield for the S&P 500 Index is calculated by taking the weighted average of each member company’s full-year dividend and dividing it by the index’s current share price.
Falling dividend yields from S&P 500 companies
The S&P 500 Index dividend yield has fallen well below its average historical level in the past few years. The overarching reason for this decline is the impact the Covid-19 pandemic has had on companies and consumers. The index itself notched its biggest one-day decline since the Black Monday crash of 1987 when it tumbled 12% on March 16, 2020. At the same time, the dividend payments companies were making to shareholders also fell. Out of almost 400 dividend-paying corporations in the US, 213 cut dividends and 93 omitted payments altogether in the second quarter of 2020, according to a paper published by the U.S. National Library of Medicine.
S&P 500 stalwart Disney was among the companies that suspended their dividends in 2020. The overall proportion of dividend cuts and omissions was three to five times higher than in any quarter since 2015, the study found. As the pandemic has eased in 2021, the S&P 500 Index has skyrocketed to record highs. But yields have remained below average.
Ironically, the lingering yield doldrums may be an unintended consequence of a soaring stock market. That’s because yields are calculated by dividing the diminished annual dividend payments by ever-rising share prices. The S&P 500 had gained about 25% in 2021 as of mid-November.
As of November 2021, the S&P’s dividend yield was about 1.3%, compared to an average yield of 4.29%. Even so, that yield is up slightly from the all-time low of 1.11% in August 2000. The record high was a whopping 13.84% in June 1932, when the US stock market was near its all-time low during the Great Depression.
Pandemic aside, only a handful of companies in the S&P 500 are generally considered star dividend performers. The average yield of member companies is usually about 1% to 2%. Some companies pay no dividends at all. Heavyweights such as Amazon, Alphabet, and Berkshire Hathaway’s Class B shares are in the no-dividend club. These companies are among the S&P 500’s top 10 holdings by weight.
Dividend standouts do exist. Oil giant ExxonMobil, tobacco seller Altria, and cybersecurity company Iron Mountain all were delivering yields above 5% as of November 2021.
However, yield isn’t everything when it comes to dividend stocks. Investors also want to know that the company delivering the high dividend payments is likely to continue doing so.
To track the index’s most consistent dividend payers, S&P Dow Jones Indices established the S&P 500 Dividend Aristocrats. This index tracked 65 companies in 11 industry sectors as of November 2021.
The aristocrats don’t necessarily flaunt the highest yields. Instead they have followed a policy of increasing dividends for at least 25 consecutive years. Unlike the components of the S&P 500, these companies all carry equal weight in their index. And they can’t represent more than 30% of any given industry sector.
Consumer products behemoth Procter & Gamble has increased its dividend for 65 straight years. Its dividend yield was 2.4% as of mid-November 2021. P&G shares the longest streak with comparatively little-known Dover Corporation and Genuine Parts Company. Dover, which makes industrial products, posted a dividend yield of 1.13% in November 2021. Genuine Parts, a distributor of auto and other parts, had a yield of 2.38%.
Overall, the dividend aristocrats have rewarded investors with higher returns and lower volatility than the S&P 500 Index over all time periods, the S&P Dow Jones Indices report found.
S&P 500 investments
These funds offer income to investors by owning dividend-paying stocks. The funds collect regular dividend payments and distribute them to holders in two ways: cash paid directly to investors or reinvestments into the fund’s underlying stocks.
The SPDR S&P 500 ETF, which trades under the ticker SPY, is the oldest and biggest ETF to track the S&P 500, with about $425 billion in assets under management. It’s administered by State Street Global Advisors. It pays a dividend quarterly and had a yield of about 1.3% as of November 2021.
This ETF pays dividends in cash each quarter, though it holds them in a non-interest-bearing account before making the payment. Dividends are distributed to investors based on their holdings.
Other ETFs may temporarily revinest the dividends back into the holdings of the fund until it comes time to make a cash payment. Investors themselves may also have the option to reinvest all of the dividends back into the fund.
Mutual funds are legally required to distribute the dividends they’ve accumulated at least once a year. Some do so quarterly or even monthly, and others pay semiannually or wait out the full year. Fund investors may also opt to reinvest their dividends rather than receiving a direct payment. They can accomplish this through a dividend reinvestment plan, or a DRIP.
It’s important to note that some funds may display a distribution yield. This is not the same as the dividend yield. The distribution yield represents all of the distributions a fund paid in the past 12 months, divided by the current price of the fund. It includes both dividends and capital gains, which are the result of selling some of the fund’s assets at a profit. The dividend yield considers only dividends.
It’s also important to understand that while a majority of the companies in the S&P 500 pay cash dividends to investors, the value of the index does not include gains from these dividends. Investors can factor those payments into their returns.
If you’re ready to start growing your capital, Titan is ready for you. Our team of exceptional investment analysts manage hundreds of millions of dollars, investing our clients in actively-managed, long-term strategies with an eye on massive growth potential. Through our award-winning app, you’ll ride shotgun with some of the smartest investment minds in the business. Sign-up takes minutes: get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.