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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.
Figure 10 of Ed Yardeni’s freely available PDF (https://www.yardeni.com/pub/buybackdiv.pdf) shows that including buybacks bumps the yield to roughly 3%. The S&P dividend yield has been about 2% in the last 2 decades, with buybacks adding perhaps another 2%, for 4% total. The recent decline in buybacks has been even worse than dividend yield, and buybacks are expected to increase strongly for next year according to the companies themselves (though I think one shouldn’t assume they’ll always follow through. As Neils Bohr is reputed to have said, “Prediction is very difficult, especially if it’s about the future!”)
And, if you accumulate more shares during working years, tapping just dividends or a portion can add an income stream in retirement or a hedge against inflation