Table of Contents
Why do companies pay dividends?
Falling dividend yields from S&P 500 companies
S&P 500 investments
The bottom line
Jun 21, 2022
7 min read
The S&P 500 Index tracks 500 of the largest companies that trade on major US stock exchanges. More than 80% of these companies pay 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.”
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.
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.
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.
The S&P 500 Index tracks 500 of the largest companies that trade on major US stock exchanges. More than 80% of these companies pay dividends. Investors in S&P 500 index mutual funds and ETFs can take advantage of the dividends, either through direct cash payments or reinvestment of the dividend amounts back into the funds. They can gauge the desirability of dividends by their yields, or the annual dividend payment divided by the stock price. The higher the yield, the more the investor is getting for their money.
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What Is the S&P 500 & How Does It Work?
The S&P 500, short for the Standard & Poor’s 500 Index, is a stock market index that consists of 500 of the largest publicly traded companies operating in the U.S.
Is the S&P 500 a Good Investment?
The S&P 500 is typically regarded as the benchmark for US equities and has produced average annual returns of about 10%, or a bit more than 7%, adjusted for inflation.
How to Invest in the S&P 500
Investors can’t buy a piece of the S&P 500 itself. Rather, they can buy shares of index funds that track the S&P 500 index, which is made up of individual companies.
What Companies Are in the S&P 500?
Companies are invited to join the S&P 500 based on their market capitalizations and other criteria that indicate their financial stability.
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