Dividends are kind of a craze now, as people focus on income in an environment where income with reasonable risk is hard to come by. Now, I used data from S&P 500 (INDEX.INX) to create this graph. I suppose I could go further back in history and use Shiller’s dataset, but the era of high dividend yields on stocks is over, at least for now. I can be taught, but I don’t see a lot of present relevance to pre-1990 dividend yields. The prices of stocks as income vehicles has been bid up, and buybacks absorb much of the free cash flow from mature corporations.
That said looking at 1989 to the present, what do we see? Dividends rose at a rate of 4.72%/year over the period, and people were willing to capitalize dividends at a rate that grew at a rate of 2.07%/year over the period. The total return being 9.47%/year over the period leaves 2.42%/year to be the return from the dividends, and capital gains from reinvested dividends.
In one sense, the blue line above gives a fair statement of the crisis we have gone through. Profits got smashed in 2008-2009, much more than in 2002. (Note that financials were the core of the recent crisis but were in good shape in 2002.) In both cases, dividends came back.
In another sense, the blue line is not indicative of the crisis. Labor force participation has dropped incredibly. The unemployment rate may be low, but only because many have given up on finding jobs.
My only counsel here is not to seek dividends for their own sake, but accept them if offered in a firm that offers good prospective returns. I do not look for dividends, but 31 out of my 34 holdings pay dividends, and the average dividend (including non-payers) is 0.7% higher than the S&P 500 dividend yield at 2.75%.
I don’t so much believe that dividends have value, as many companies that pay dividends have value. Free cash flow is valuable, and results in dividends, buybacks, and reinvestment in the business. Find those firms that produce free cash flow, and dividends will typically follow.
By David Merkel, CFA of Aleph Blog
