Low Dividends are a Function of Expensive Stock Markets

Source: Factset

In addition to bond yields being so low that one needs to be a multi-millionaire to live on the interest payments, conservative investors are also now coping with dividend yields at all-time lows. Dividends are generally thought of as increasing during strong growth periods when companies are profitable and falling if earnings are weak. Following this trend, you can see in the blue line above, that dividends had steadily increased in absolute value until the Covid-19 pandemic introduced uncertainty into earnings growth. However, the growth in dividends was vastly outpaced by the growth in share prices. As dividends grew an impressive 122% over the past ten years (since Jan 2012), this has not kept pace with the explosive growth of 342% in the stock market over the same time frame. This has driven the dividend yield of the S&P500 from its earlier range of 1.8% – 2.2%, down to its currently level of 1.25%

Another reason for the low average dividend yield is that, more than 20% of the stocks in the index pay no dividends, including some of the highest capitalized stocks in the market.1 Companies such as Amazon, Facebook, Google, and Tesla have joined Warren Buffet’s Berkshire Hathaway in not paying dividends.

The average dividend of the remaining ~80% of the stocks in the index is 2.02%2 . This requires a large size holding to provide a comfortable living. If one moves into the top decile of the index, one can earn dividends of between 4½% and 10%.

One should always be wary of unusually high dividend paying companies, as it can be a sign of problems and an inevitable cut to the dividend. But if you take a narrower focus, the top paying sectors are Electricity and Fixed Line Telecommunications at 4.54% and 4.33% respectively. These higher paying dividend stocks are somewhat less volatile than the rest of the market and thus provide some succour for hard pressed income investors.

As for the broader market, the very low level of dividend yields is just one more warning signal that this market is quite stretched, and will need significant stimulus to remain on its current uptrend.


Disclaimer: Please note that the publication is designed to provide general information only.  It reflects the thoughts and opinions of Logan Wealth Management and should not be construed as financial advice, nor should the information be considered a substitute for personal advice.  Information used in this publication has been gathered from sources believed to be reliable. Logan Wealth Management is not responsible for and assumes no liabilities or responsibility for any loss or damages suffered as a result of the use or misuse of, or reliance on the information or content of this publication. Please consult your financial adviser to determine whether the information is applicable to your personal situation.

1 http://www.dividendsranking.com/Index/SP-500.php

2 https://www.indexarb.com/dividendYieldSortedsp.html