A History of the S&P 500 Dividend Yield

Dividend yields from blue-chip U.S. companies rose during the first half of 2016. Between January and June 2016, the Standard & Poor's 500 Index (S&P 500) produced a dividend yield of approximately 2 to 2.2%, more than 100 basis points (BPS) higher than the average during the previous five years. However, the rate of dividend increases was the slowest since 2009, when the country officially exited the Great Recession. Slowed dividend growth is one more sign that small dividends remain the new normal.

A quick review of the history of the S&P 500 reveals just how abnormal sub-3% annual yields have been. Thanks to aggressive monetary policy and the rise of technology stocks, today’s dividend investors have a bigger hill to climb than their predecessors.

During the 90 years between 1871 and 1960, the S&P 500 annual dividend yield never fell below 3%. In fact, annual dividends reached above 5% during 45 separate years over the period. Of the 30 years after 1960, only five saw yields below 3%. The sharp change in S&P 500 dividend yield traces back to the early to mid-1990s. For example, the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.95% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.99% between 2009 and 2015.

Two major changes contributed to the collapse of dividend yields. The first was Alan Greenspan becoming chairman of the Federal Reserve in 1987, a position he held until 2006. Greenspan responded to market downturns in 1987, 1991 and 2000 with sharp drops in interest rates, which drove down the equity risk premium on stocks and flooded asset markets with cheap money. Prices started climbing much faster than dividends. Despite evidence that these policies contributed to then-recent housing and financial bubbles, Greenspan’s successors effectively doubled down on his policies.

The second major change was the rise of internet-based companies in the United States, especially following Netscape’s initial public offering (IPO) in 1995. Technology stocks proved to be quintessential growth players and typically produced little or no dividends. Average dividends declined as the size of the tech sector grew.

The S&P 500 is the most widely cited single gauge of large-cap equities on U.S. stock exchanges. Standard & Poor's estimates that more than $7.8 trillion is benchmarked to the index, making it one of the most influential figures in the world of finance. To be included, a company must be publicly traded in the United States and report a market capitalization of $5.3 billion or greater.

The dividend yield for the S&P 500 is calculated by finding the weighted average of each listed company's most recently reported full-year dividend, then dividing by the current share price. Yields are published and calculated daily by Standard & Poor's and other financial media.

The composition of the S&P 500 changes throughout time. Some listed companies de-list and go private, while others merge or split into multiple companies. Listed companies might also undergo serious changes without new stock tickers emerging.

For example, Bank of America Corp. (NYSE: BAC) joined the S&P 500 in July 1976 and was given the ticker BAC. In 1998, the bank experienced severe financial distress following a default on Russian bonds. It was subsequently acquired by NationsBank, which decided to keep the more recognizable name Bank of America Corp.

Such changes make equivalent comparisons difficult to make over time. Even though the S&P 500 dividend yields from 1976 and 1999 both included reported dividends from the same ticker, BAC, the ticker represents very different companies at different points in time.

All annual dividend yields are quoted in nominal terms and do not take into consideration the annual rates of inflation present over the same period. Inflation reduces the real impact of all returns, including dividends, and generally makes it more difficult to grow real wealth. Additionally, dividend yields represent absolute values, so they cannot tell you if dividend-paying stocks in the S&P 500 are superior to alternative investments.