As stock prices have soared, the importance of dividends has faded in the eyes of many investors who are deriving an increasingly large proportion of their returns, instead, from capital gains. Meanwhile, bond yields are on the upswing, making dividend-paying stocks less attractive for income-oriented investors, the Wall Street Journal reports.
As of the close of trading on January 16, the dividend yield on the S&P 500 Index (SPX) was a scant 1.74%, per multpl.com, while the yield on the 10-Year U.S. Treasury Note closed at 2.55% on January 16, per CNBC. The gap between the yields on the S&P 500 and the T-Note is the widest since July 2014, the Journal notes.
Dividend Payers Lag Recently
So far in 2018, the S&P 500 industry sectors that have the highest average dividend yields have lagged badly. For the year-to-date through the close on January 16, the S&P 500 Utilities Select Sector Index (IXU) was down 4.77%, while the Real Estate Select Sector (IXRE) fell 4.86%, per S&P Dow Jones Indices. By contrast, the S&P 500 advanced 3.85% during the same period.
As a result, utility-oriented mutual funds have been experiencing brisk redemptions, with net withdrawals equaling $400 million in the seven days ending January 3, per data from Bank of America Merrill Lynch cited by the Journal. For the year-to-date through January 16, the aggregate money flow out of utility stocks has been $1.8 billion, per the WSJ Market Data Group.
Long Term Decline
The current S&P 500 dividend yield of 1.74% is far below its median value of 4.31% since 1870, per multpl.com. Its all-time high was 13.84% in June 1932, when the Great Crash of 1929 had just about run its course, and its all-time low was 1.11% during the Dotcom Bubble in August 2000. Nonetheless, the S&P 500 dividend has been on a longterm downtrend since reaching 6.24% at the end of August 1982, according to the same source. (For more, see also: Why The 1929 Stock Market Crash Could Happen in 2018.)
But Still Significant
However, even with greatly diminished yields by historical standards, dividends still represent a significant portion of total returns for investors focused on the long run. The current bull market offers an example. The prior bear market generally is considered to have ended on March 9, 2009. From its closing value on that date through the close on January 16, 2018, the S&P 500 advanced 312%. The S&P 500 Total Return Index, which includes dividends, rose 395% during the same time span, per Yahoo Finance. As a result, dividends have contributed 83 percentage points of that total return.
6 Dividend Picks
Stocks that pay large dividends remain attractive to many investors. One reason: these stocks have a big advantage over bonds because of the opportunity for increased payouts over time. Earlier this week, Investopedia highlighted six such stocks with anticipated payout boosts during the next few weeks: Charles Schwab Corp. (SCHW), Valero Energy Corp. (VLO), NextEra Eneregy Inc. (NEE), Allstate Corp. (ALL), Cisco Systems Inc. (CSCO), and The Home Depot Inc. (HD). (For more, see also: 6 Dividend Stocks Poised for Stellar Payouts.)