The S&P 500 is the most popular index to track the United States’ stock market.
Examining the S&P 500’s current and historical dividend yield can provide insight into the future of dividend payments in United States markets.
The dividend yield of the S&P 500 matters. In fact, dividends are responsible for around 40% of total market returns over the long run.
Source: The Power of Dividends, Hartford Funds, page 2
In decades with long bull markets (1990’s, 2010’s so far) dividends make up a smaller portion of total returns. When capital gains are weaker, dividends become more important.
Today, the S&P 500’s 1.8% dividend yield is near historical lows. Its historical average dividend yield is 4.3%.
Source: Multpl.com
Part of the reason for this is because the S&P 500’s valuation level is significantly elevated. The current price-to-earnings ratio for the S&P 500 is 24.7, versus a historical average of 15.7.
If the S&P 500’s price-to-earnings ratio were to revert to its historical average, the S&P 500’s dividend yield would be 2.8% at current payout ratio levels.
But a 2.8% yield is still only 65% of the historical average yield of 4.3%. The rest of the yield discrepancy is caused by the constituents of the S&P 500paying out a smaller portion of their earnings as dividends.
Of the 6 largest S&P 500 stocks by market capitalization, only 2 pay any dividend at all. The 6 largest S&P 500 stocks by market cap along with their yields (or lack thereof) are listed below:
The S&P 500 is market cap weighted. This means the largest companies by market cap make up a disproportionate weighting in the S&P 500. The 6 stocks above make up around 18% of the S&P 500 and have an average yield of just 0.5% between them.
