A famous investor once said that successful investing means owning businesses and earning money from the profits and dividend payments they make. This idea is important today because when you buy stocks, you can make money in two ways: from the stock price going up and from dividend payments that companies give to shareholders.
Right now, stock prices are very high and dividend payments are very low. The S&P 500 (a group of 500 large companies) is only expected to pay about 1.3% in dividends this year. The last time dividends were this low was in 2000 during the dot-com bubble. When the Federal Reserve (the Fed) cuts interest rates, it changes how investors can earn income from their investments.
Many people think dividends are boring compared to exciting growth stocks. But dividend payments can add up over time and provide steady income, especially when stock prices go up and down a lot. Companies that both pay dividends and see their stock prices rise over time can give investors regular cash payments plus long-term wealth growth.
How people think about dividends has changed over time
For most of the 1900s, dividends were a main way people made money from stocks. Dividend payments were often 5% to 7% per year. People bought stocks mainly for the income they provided, similar to how people buy bonds today.
This changed when investors started focusing more on technology companies and growth. During the 1990s dot-com boom, high-growth tech companies didn't pay dividends because they put all their money back into growing their businesses. Companies also started buying back their own stock instead of paying dividends because it was more tax-friendly.
Today's low dividend payments reflect this change. Technology sectors like Information Technology and Communication Services only pay about 0.6% to 0.8% in dividends. This includes the Magnificent 7 stocks, which generally pay low dividends or none at all. However, sectors like Real Estate, Energy, and Utilities still pay over 3% in dividends.
Company decisions and interest rates affect dividend attractiveness
Companies can use their profits in two ways: invest back in their business or pay dividends to shareholders. Companies should pay dividends when they have enough money for good investment opportunities or when their business is designed to generate income for shareholders.
But dividends do more than just return extra cash. Many companies pay steady dividends to attract investors and show they are financially stable. When dividends grow over time, it signals that the company is healthy and management is confident about future earnings.
Interest rates also affect how attractive dividend-paying stocks are. When government bond yields are higher than dividend yields, bonds become more attractive. Right now, 10-year Treasury bonds pay about 4.1%, which is much higher than most stock dividends. As the Fed cuts rates, this could change and make dividend stocks more appealing.
Why dividends matter for your portfolio
Dividends are an important part of your total investment returns. Since 1926, dividends have provided 31% of the total return from the S&P 500, while stock price increases provided 69%. Most investors today focus mainly on stock prices, except when they need income for retirement.
The chart shows that $1 invested in stocks in 1926 grew to about $18,000 by 2025. This growth came from both dividends and rising stock prices. Sometimes dividends provided most of the return, other times stock price increases did. The key was staying invested through different market cycles. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
For people near or in retirement, generating current income becomes more important. But this doesn't mean you should only buy high-dividend stocks. "Yield chasing" (focusing only on the highest dividend payments) can be risky because it can lead to poor diversification and concentration in unstable companies.
Investors should find the right balance of dividends and growth for their goals. This "total return" approach helps ensure portfolios can perform well in different market conditions, whether through dividends, stock price increases, or both.
The bottom line? Even though dividend payments are near historic lows, they still play an important role in investment portfolios. Investors should focus on both stock price growth and dividends to reach their financial goals.
1. https://www.spglobal.com/spdji/en/documents/research/research-sp500-dividend-aristocrats.pdf
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.