Investors understand the value of getting income from their portfolios. For those who own stocks, dividend income has been vital in providing the cash that income investors need to make ends meet. Yet some might be surprised by just how important a role dividends play in investing. Below, you'll find five statistics about dividends that could surprise you.
Dividends represent a huge portion of the total return from stock investing
Most people pay attention to index levels rising, but when you take a look at the returns that stocks generate, a large fraction of overall gains come from dividends. Looking at the S&P 500 (^GSPC 0.98%) over the past 50 years, those who invested in the index have seen its level rise at an average annual pace of about 6.5%. For a $1,000 investment, that has increased its value to more than $24,000.
However, when you add in dividends, the figures rise sharply. The average total return jumps by half, weighing in at 9.75%. The impact on a $1,000 investment is even more impressive, as its value rises to nearly $115,000. The power of getting and reinvesting dividends can amplify your returns greatly if you don't need the cash for immediate purposes.
Most stocks now pay dividends
Investors have heightened their demand for dividend-paying stocks, and companies have responded by being more shareholder-friendly in their decisions about allocating capital. As of January, 418 members of the S&P 500, or almost 84% of its constituents, paid dividends. The weighted average dividend yield for the index was 2.28%, a rate that's well above the prevailing interest rate for the 10-year Treasury note for that period.
Falling interest rates in the fixed-income arena have contributed to the importance of dividends. With companies having available cash flow, the appeal of dividends has led many of them to institute quarterly payouts for the first time or make increases to the dividends they already pay. That's been good news for income investors.
Technology stocks have become dividend giants
During the initial rise of technology stocks in the 1980s and 1990s, it was extremely rare to find tech companies that paid dividends. Most of these upstarts chose instead to reinvest any available capital back into their fast-growing businesses, and if they did return capital to shareholders, they were more likely to use stock buybacks, which were seen as being more tax-friendly.
Now, however, the technology sector makes a huge contribution to the overall dividend payouts of the stock market. Among stocks in the S&P 500 (^GSPC 0.98%), those classified as information technology stocks are responsible for more than 15% of the index's overall dividend payments. That's just behind the financial sector, which has the No. 1 spot. Yet while there are 82 financial stocks in the S&P 500 that pay dividends, only 45 tech stocks claim that honor. The evolution of tech stocks as dividend payers shows the natural progression that a company goes through in reaching maturity.
Stocks raising their dividends dwarf stocks cutting them
The trend toward stocks paying higher dividends has been steady and inexorable over time. In 2015, 2,159 stocks tracked by S&P Dow Indices raised their dividends. By contrast, only 394 stocks reduced their dividends, and 110 more cut their dividends entirely during the period.
If anything, 2015 was an anomaly in having so many companies reduce their dividends. Over the previous five years, the average number of companies making dividend cuts was less than 200, and outright eliminations came to about 40. On the other side of the coin, an average of more than 1,700 stocks raised dividends, with the all-time high coming in 2014 with 2,280 stocks making increases.
The energy bust has been tough on dividends
Dividend trends move in a cycle, and the plunge in crude oil prices has led many companies in the energy sector to take drastic action with their payouts. Many have suspended their dividends entirely, and others have reduced payouts in order to conserve cash.
Nevertheless, yields in the sector remain attractive. According to S&P Dow Indices, the weighted average yield among S&P 500 energy stocks are at 3.63%, with 34 companies still making dividend payments. Prolonged downward pressure on oil prices could lead to more cuts, but many companies remain committed to returning capital to shareholders.
Dividends play a vital role in providing income to investors. Being aware of trends in dividend practices will help you take maximum advantage of the added returns that dividends offer to those who seek them out.