19

Background: The S&P 500 is an index that has consistently grown across many decades. On the other hand, since the 1940s, the dividend yield has been decreasing. It used to be around 6%, while in recent years, it has been around 1.5%.

Question: Why is the growth of the value of dividends significantly lower than the growth of the value of stocks in the S&P 500?

Sources:

Improve this question
3
  • 2
    Your 2nd link provides 2 possible reasons for that (after "Two significant changes contributed to the collapse of dividend yields."). Both look convincing. Do you want us to list other possible reasons?
    – Solarflare
    Commented Dec 10, 2023 at 12:37
  • @Solarflare: The first reason, the one about the cheap money, is somewhat convincing. However, the second one raises another question: why are internet companies inherently growth-oriented, and why were the others not?
    – Tomek Tarczynski
    Commented Dec 10, 2023 at 14:39
  • The yield measures the payout vs the stock price, it would be interesting to compare the payout vs the earnings or revenue from then vs now. P/E is certainly much higher these days which would account for a chunk of the yield difference.
    – rtaft
    Commented Dec 13, 2023 at 14:04

2 Answers 2

Reset to default
35

Stock buybacks are an alternative way of returning money to shareholders that is being used instead of dividends. Some reasons to prefer buybacks are:

  • Each shareholder can choose when to realize income. For example, young investors earning a salary can avoid adding to their income.

  • Minimizes unnecessarily moving in/out of positions. A dividend is an automatic, periodic cash-out. If the investor does not need the money, they have to log in and buy more stock, potentially paying transaction fees and spending time out of the market for no reason.

  • Governance. Dividends are sticky and hard to change because investors expect them to be recurring. The market reacts strongly to dividend changes. This creates bad incentives for management and can lead to, for example, companies continuing to pay a dividend even when they need the money elsewhere (and then taking out expensive loans to cover the gap). Or conversely, companies sitting on a slowly growing pile of unneeded cash because management is afraid to increase the dividend (since it is seen hard to reverse).

Improve this answer
7
  • 7
    Perfect! Buybacks were the piece that I was missing. Companies have switched heavily to buyback instead of dividends. SInce around 2004, companies are spending more on buybacks than dividends. Source: prnewswire.com/news-releases/…
    – Tomek Tarczynski
    Commented Dec 11, 2023 at 12:59
  • 5
    #2 is usually solved with dividend reinvestment plans. Many (most?) dividend-paying companies provide this option.
    – Barmar
    Commented Dec 11, 2023 at 16:23
  • 3
    @Barmar The tax consequences of a dividend being reinvested are the same as if you took the dividend and bought the stock.
    – Chuu
    Commented Dec 11, 2023 at 17:04
  • 3
    @Chuu Yes, but the second bullet doesn't say anything about taxes. It talks about the work of making the purchase and the transaction fees (which DRPs don't normally charge).
    – Barmar
    Commented Dec 11, 2023 at 17:30
  • Not sure I agree that this is the only, definitive reason. Certainly there are other correlated factors, such as the growth of tech companies in the S&P that typically pay less dividends (focusing on growth), and the rise in share of retirement plans that do not benefit from dividend tax treatment.
    – D Stanley
    Commented Dec 11, 2023 at 21:06
19

Why is the growth of the value of dividends significantly lower than the growth of the value of stocks in the S&P 500?

The 500 companies that makeup the index determine if they pay their shareholders dividends, and how much. The index and the fund play no roll in this decision.

In general companies have determined that paying dividends isn't something that their shareholders want and expect. Some companies still pay dividends, and they consider this to be an integral part of their culture. Others have said we can use the money that would have gone to dividends to grow the company.

This lack of dividends was especially true with the rise of tech companies that were founded since the 1970's. They grew the business based on their profits. Sending a portion of their profits to shareholders wasn't part of the plan.

Improve this answer
12
  • 1
    Interesting, I always considered mature stocks as assets providing passive income in the form of dividends, while investors would prefer to see the companies grow, which increases their value. Of course, while the company is still in the growth phase, it wouldn't make sense to pay dividends.
    – Tomek Tarczynski
    Commented Dec 10, 2023 at 14:43
  • 7
    Stockholder expectations shifted with the huge influx of new investors when 401k's replaced most pensions. For good or ill (mostly I'll, as it creates perverse incentives for management) many people are now demanding companies grow the stock price as much as possible rather than returning dividends to stockholders. (The rationale seems to be trying to push profits into being capital gains rather than ordinary income, which does not strike me as a good enough reason but I can't outvote the other stockholders). The S&P is just reflecting this change.
    – keshlam
    Commented Dec 10, 2023 at 15:18
  • 1
    Qualifying dividends for lower tax rate (qualified dividends taxed the same as capital gains) was supposed to help reversing the trend, but ended up just reducing taxes on the rich. Tech companies do buy-backs instead of dividends.
    – littleadv
    Commented Dec 10, 2023 at 17:16
  • @TomekTarczynski: I'm not sure passive income is a good reason to prefer stocks that pay dividends. When a stock pays a dividend, the value of a share instantly drops by the value of the dividend. Ignoring tax implications, an investor shouldn't experience much difference between being paid a $10 dividend vs selling $10 worth of stock.
    – Brian
    Commented Dec 11, 2023 at 15:05
  • 1
    @keshlam It's strange to link that to the rise of 401k plans, since there's no tax difference between dividends and CG when the shares are held in a retirement plan. And I think most 401k's only allow you to invest in mutual funds rather than individual companies (plus the employer's stock if they're public).
    – Barmar
    Commented Dec 11, 2023 at 16:27

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .