Stocks/dividends: For the first time in modern stock market history, investors in U.S. equities are likely to finish a decade empty-handed. The S&P 500 Index is set to provide a negative 0.8 percent average annual total return. Even the grim 1930s did better. While share prices fell, dividends made the average total return positive, by 1 percent a year. Investors may bemoan their misfortune, especially when they consider annual inflation of 2.5 percent in the period, compared to annual deflation of 2 percent in the 1930s. But they can take two small comforts.
First, it could have been worse. By Japanese standards, the U.S. technology stock bubble that inflated share prices at the beginning of the decade was only a baby frenzy. The Nikkei index is still only at a quarter of its all-time high, hit two decades ago. Second, shareholders actually got more cash out of the companies than shown in the statistics of Standard & Poor’s, which oversees the benchmark index. The calculations do not include share buybacks, but these push money to equity holders in much the same way that dividends do. And in seven of the past 10 years buybacks have been larger than dividends – almost double between 2005 and 2007.
Over the last generation regular dividends have increasingly been considered passé. Thirty years ago 94 percent of S&P 500 companies sent quarterly checks to their shareholders. Last year just 74 percent did so, according to S&P. And many of those companies sticking with tradition have been more miserly. Since 1936 companies have paid an average of 53 percent of their earnings in dividends. Over the past decade, they have offered up just 46 percent. After this meager decade a steady flow of cash in the hand looks a lot better than potential capital gains in the bush. In financial theory, assuming equalized tax rates, the two have identical value. In practice, though, a relatively steady dividend payout reduces investment risk and keeps corporate executives from taking too many big bets on risky investments and acquisitions. It’s time for dividends to come back into fashion.
