The Standard & Poors 500 (S&P 500) Index is a popular benchmark index of large-cap stocks in the United States. The S&P 500 Index price represents the total return that includes both changes in price and the effect of dividends.
The S&P 500 uses an index divisor that scales the index down to a more manageable and reportable level. The divisor is a proprietary value that can change with stock splits, special dividends, spinoffs, and other variables that could affect the index’s value. Other total return indexes include the Dow Jones Industrials Total Return Index (although the Dow Jones Industrial Average is not a total return index) and the Russell 2000 Index.
- The S&P 500 is a total return index of U.S. large-cap stocks, meaning that its price level includes dividends as well as capital gains.
- The index price is computed using a real return, which is both accounting for stock price changes and dividend payments.
- Low dividend yields on the index can be attributed to the fact that fewer companies pay cash dividends now than before, and a low-interest-rate environment that makes even small dividends attractive.
Dividend Yield of the S&P 500
As of November 2020, the dividend yield for the S&P 500 was 1.80%. This is slightly below the historical average of 1.87%. The record high for dividend yields was in 1932 at 13.84%.
The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend, then dividing by the current share price. Yields are published and calculated daily by Standard & Poor's and other financial media.
History of S&P 500 Dividends
During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period.
In the first half of the 20th century, dividends tended to grow at a similar rate as the stock market. This relationship decisively changed in the 1960s, as stock market gains did not necessarily translate into rising dividends at the same rate. Of the 30 years after 1960, only five saw yields below 3%. In the bull market of the 1980s, this relationship diverged further when dividend yields fell dramatically as dividends stayed flat and the broader market moved higher.
The sharp change in the S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.95% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.99% between 2009 and 2015.
All annual dividend yields are quoted in nominal terms and do not take into consideration the annual rates of inflation present over the same period.
Reasons for Lower Dividend Yields
Two major changes are thought to have contributed to the collapse of dividend yields. The first was Alan Greenspan becoming chairman of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991, and 2000 with sharp drops in interest rates, which drove down the equity risk premium on stocks and flooded asset markets with cheap money.
Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.
The Second Major Change
The second major change was the rise of internet-based companies in the United States, especially following Netscape’s initial public offering (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.
Part of the reason for this change in attitude toward dividends has been the reduced inflationary pressures and lower interest rates, reducing pressure on corporations to compete with the risk-free rate of return.
Low interest rates even make low dividends attractive, and high interest rates can make even high dividends unappealing. For example, in 1982, the dividend rate was 4.93% for the S&P 500, but the interest rate on the 10-year Treasury was around 14%. In contrast, as of December 2017, the dividend yield for the S&P 500 was 1.84% while the yield on the 10-year Treasury was 2.35%.
There is much more demand for dividend stocks in this type of environment. One of the results of central bank policy in expanding the money supply via low interest rates and quantitative easing is making dividend stocks more attractive. Dividends have been lower over time because many companies elect to return cash to shareholders in the form of stock buybacks, rather than dividends, as this technique receives more favorable tax treatment.
S&P 500 Dividend Aristocrats
The S&P 500 Dividend Aristocrats Index is a list of companies in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years. It tracks the performance of well-known, mainly large-cap, blue-chip companies. Standard & Poor's will remove companies from the index when they fail to increase dividend payments from the previous year. The sub-index is rebalanced annually in January.
Dividend aristocrats come from various industries and sectors. Some companies have been dividend aristocrats for decades, such as Emerson Electric Co., which sells electronic products and engineering services to industrial clients.
Other companies like Roper Technologies (ROP), a designer of software and other products, and A.O. Smith (AOS), which makes water heating and purification equipment, were added to the list in 2018.