Throughout most of the past century, the median dividend yield for the S&P 500 have stood at 4.38%. Today, the current dividend yield on the S&P 500 is 2.10%. At first glance, that may make it appear as if stocks are overvalued. However, the median price-to-earnings ratio for stocks was 14.45 compared to a current p/e of 15.78.
How do we account for the disparity?
- There has been a change in investor expectations. For far too long, investors have developed a cult-like obsession with capital gains. They accepted lower and lower dividend payouts so managements got away with hoarding more and more cash. What executive wouldn't like this fortunate turn of events? Pay packages are often tied more to the overall size of an enterprise than they are to the competence of the person at the helm. All else equal, it is more lucrative for a CEO to run a $10 billion firm than it is a $100 million firm.
- There has been a change in tax efficiency strategies, which emphasize backdoor dividends through share repurchases programs instead of direct checks to owners.
- Interest rates have fallen to historic lows, making yield-starved investors eager to accept lower payouts than they would have considered in the past.
Of course, there are some legitimate reasons that certain companies don't pay dividends. If you own a company that doesn't, they better have a clear, rational reason for not doing so. Otherwise, they are enjoying the fruits of your capital when the cash should be flowing into your brokerage account.