WE’VE ALL BEEN looking for signs that the financial world is returning to some semblance of normalcy. I recently read a CNBC article that gave me hope. The article said that worldwide dividend payouts were expected to reach $1.39 trillion in 2021, almost back to pre-pandemic levels.
The data came from a report by Janus Henderson, a U.K. money manager. Dividends in this year’s second quarter increased 26% from 2020’s second quarter and were only 6.8% below 2019’s second quarter. Janus expects dividends worldwide to return to pre-pandemic highs within the next 12 months.
Why is this important? Dividends have historically represented a significant portion of the stock market’s long-run total return, although the relative contribution of share-price appreciation and dividends can vary greatly over the decades. Morningstar provided a good analysis of the historical contribution of dividends to stock returns. Over the period 1872-2012, the S&P 500 provided a real total return of 6.5%, with 4.5 percentage points coming from dividends.
The contribution of dividends to total return has, however, been shrinking. Dividend yields were routinely above 5% in the first half of the 20th century. In the current century, they’ve dropped to less than 2%, as companies have put more emphasis on stock buybacks. Today, the S&P 500’s yield is just 1.3%.
Analyses of long-term market returns show the value of dividends. But to achieve the highest returns, you need to reinvest those dividends. Reinvesting helps in two ways: You get the benefit of dollar-cost averaging as you buy more shares during market declines—and you enjoy the magic of compounding as you earn dividends on the dividends you’d earlier reinvested.