A brief review of the history of the S&P 500 Index and its dividend yields reveals SPX dividend yields have remained stubbornly low, below the sub-3% annual yields for the past 30-years. Some believe the low SPX dividend yields are the direct result of FED's easy monetary policies and the emergence of technology and growth stocks. So, will SPX dividend yields continue to decline?
Dividend Yield Formula
The formula for the dividend yields of the index is the total dividends earned in a year divided by the price of the index. For the popular S&P 500 Index, the dividend yield is the most recently reported full-year dividends of the stocks in the S&P Index divided by the current share prices. Historical dividend yields for the S&P 500 have typically ranged from 3% to 5%. The trend of the SPX dividend yields tilted toward sub-3% annual yields starting in the early-1990s.
Brief History of S&P 500 Dividend Yields
A deeper dive into the history of SPX dividend yields reveals the following trends. From 1871 through the 1960s, the SPX annual dividend yields rarely traded below 3%. Annual SPX dividend yields would consistently stay above 5% during this period, with dividend yields briefly touching a high of 13%-14% during the 1930s. The transition to lower S&P 500 dividend yields occurred during the early to mid-1990s when dividend yields fell below 3%. The average SPX dividend yields between 1970 and 1990 were typically around 4.00%. It declined to a low of 1.07% in Jul 2000 before rising to a high of 3.86% in Feb 2009, coinciding with the Great Recession of 2007-2009. Soon after the Great Recession, the annual SPX dividend yield averaged just around 1.95%.
Reasons for the Collapse of S&P 500 Dividend Yields
Many believe two major catalysts contributed to lower SPX dividend yields. The first was FED's Chairman Alan Greenspan's aggressive monetary stimulus programs during the market downturns in 1987, 1991, and again in 2000. Chairman Greenspan's aggressive policies flooded the financial markets with cheap money. His actions drove interest rates down, which led to a sharp decline in the equity risk premium on stocks. Stock prices, including SPX Index, responded by climbing faster than its dividends, resulting in SPX dividend yields falling. Some blamed his easy monetary policies ignited speculations in the housing markets, contributing to the global financial crisis of 2007-2009. Greenspan's successors followed similar aggressive monetary policies, leading to interest rates again falling and SPX dividend yields falling further.
The second reason that may explain the sharp decline in SPX dividend yields coincided with the rise of the internet industry. Netscape's IPO in 1995 ignited the internet/wireless technology revolution. Many investors and specifically growth investors turned to technology stocks with little or nominal dividends as the investment vehicle of choice. SPX dividend yields began to decline as the size of the tech sector grew.
It is interesting that in recent years, many companies have been repurchasing stocks instead of paying out dividends as another way to return value to their shareholders. This new trend can also explain why SPX dividend yields continue to fall.
SPX Dividend Yields and SPX Price Trends
After the Price Earnings Ratio, the second-best way to determine the value of stocks may be dividend yields. Why? The ratio conveys how much a company pays out in dividends each year relative to its share price. It reflects the amount you are getting from dividends, and in the absence of any capital gains, the dividend yield becomes the return on investment for a stock. The lower the dividend yield, the less you get for your investment and hence the more overvalued a stock.
Technical Interpretation of SPX Dividend Yields and SPX Price
The recent collapse in the SPX dividend yields from a high of 2.31% earlier in this year to a current level of 1.37% strongly suggests that SPX dividend yields can fall further. It is interesting to note that during the recent sharp decline in SPX dividend yields, SPX has rallied over 1,000 points from its Oct/Nov 2020 lows or 31%. Although some believe SPX is overvalued and nearing its peak, the long-term SPX dividend yields chart hint that a retest of the 2000 low at 1.07% is possible. If SPX dividend yields decline to 1.07%, would this lead to the elusive speculative top in SPX that many pundits forecasted?