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About Those Falling Dividend Yields

I've been worried about a trend for the last three years.

With interest rates at all-time lows, investors have gone crazy for stocks with high dividends, since it's one of the last holdouts of good yields.

That, I've proposed a few times, might be setting up something akin to a dividend bubble (although I hate using that word).

But the more I look at the data, the more skeptical I am of that view.

Yes, a few companies have seen their yields plunge as valuations are bid up. But that narrative isn't as systemic as I thought.

Take the top 10 non-financial companies in the Vanguard High-Yield Index -- a proxy for the most popular dividend stocks.

While the 10 stocks have performed well over the last three years, beating the S&P 500 by more than 10 percentage points, the average dividend yield of the group has barely moved at all:


Return Since 2010

Current Dividend Yield

Dividend Yield, 2010





General Electric (NYSE: GE  )








Johnson & Johnson 




Microsoft (NASDAQ: MSFT  )




Procter & Gamble (NYSE: PG  )












Coca-Cola (NYSE: KO  )




Philip Morris International (NYSE: PM  )










Source: S&P Capital IQ.

There's a simple explanation for this.

When I first used the "dividend bubble" phrase a year ago, I gave a few reasons for why I could be wrong. One was that "the dividend payout ratio on S&P stocks is near an all-time low." I wrote: "S&P 500 companies could more than double their dividends without breaking any historical precedent."

That seems to be the prevailing trend.

In 2010, the average company on this list paid out 42% of its earnings as a dividend. In 2012, that payout ratio grew to 55%.

Take Microsoft. Since 2010, net income per share has grown 15.4%, while dividends per share increased 71%. Its payout ratio grew from 24.4% to 44%.

Coca-Cola is similar. Its payout ratio has jumped from 35% in 2010 to 53% in the last year.

What happens next? The overall dividend payout on the S&P 500 is still abysmally low by historic standards, but with so much executive compensation now coming in the form of options that don't benefit from dividends, it's hard to know whether we should expect a reversion to the mean -- higher dividends might not be in the best interest of many CEOs and CFOs who decide the payout ratio.

But for now, the bottom line is that the rush toward dividend-paying stocks may be more justified than some (including me) once thought. 

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's free, so simply click here now and get your copy today.

Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On April 30, 2013, at 5:04 PM, Njja wrote:

    Blue chip dividend stocks are an investment option that should be considered by intelligent investors. With our current economic environment, low interest rates, people planning on retirement have few solid options.

    I have always felt that blue chip companies such as KO, MO, to name a few are lifetime investments to be passed from generation to generation.

    Yes yields are down why you ask? Because prices are up! Smart investors have enjoyed dividends 10 times greater then bank yields, and an increase in their net worth. These solid companies should be considered whenever you have additional funds to invest.

  • Report this Comment On May 01, 2013, at 10:38 AM, Pilm wrote:

    No doubt these companies have been fantastic investments over the last several years, not only paying a good dividend, but share prices going to 5 year highs. The concern of course is that a sudden and unexpected market correction will one day come along and wipe out all these gains from the last several years in a day or two. The 2009 correction is now 4 years behind us, and big corrections typically occur every 5 years or so, and with the market at an all time high and various global risks abounding, I'd proceed with caution.

  • Report this Comment On May 01, 2013, at 1:34 PM, SkepikI wrote:

    Morgan: I don't know why a simple analysis hasn't made it into your particular article this time. I've seen bits of it spread in related articles from you in the past months.

    The sheer obviousness of investing in dividend stocks at 3% or better yield as a proxy for disastrous and seriously risky bonds will continue to drive prices up. Eventually, unless there is a REALLY interesting correction, they will be pressed to the limit of investor tolerance...then these stocks will look as risky or more risky than the out of whack, oppressed bond markets. Then the bubble might pop. Courtesy of Fed manipulation perhaps when the Fed stops its over the top oppression of rates and gluttony purchases of Bonds.

    IF you get paid 3% on your invested dollar for hanging on in a bubble pop, and its invested in solid enterprises serving customer needs that survive the pop, come back stronger... you are STILL in a better position than if you put your faith in bonds at 1% or 2%. More importantly, you have upside opportunity and downside risk protection from enterprises that can IMPROVE. Bonds? not much risk protection, and zero upside under current conditions. I cant think of any period in my lifetime where it has been so stark and so obvious that these unique conditions exist.

  • Report this Comment On May 01, 2013, at 1:41 PM, SkepikI wrote:

    And, I might add, that when you are only getting 1 or 2% yield on debt instruments like bonds, you are NOT getting paid for taking any downside risk. Investors simply cannot afford to take principal hits at these low levels of return, and its obvious they are running fearsome levels of risk of that very occurrence.

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