Friday 18 November 2011

S&P 500: Historical Downward Trend in Dividend Payout Ratio

Income in the form of dividends is an important feature of the DIY Income Investor approach. The Dividend Payout Ratio is the share of net earnings that is paid out as dividends. This metric is used more in the US than in the UK, where we tend to talk about the 'dividend cover' (the ratio of net earnings to dividend payments). Both are an indication of the company's willingness to pay dividends.

However, there is some bad news for US investors on the trend in Dividend Payout Ratio (although there may be a silver lining to this particular cloud).

A recent analysis of the Dividend Payout Ratio of the US S&P500 shows - with some variation obviously - a historical downward trend since the 1920s. What is worse, the yield on the S&P 500 is now only around 1.9%. If the payout ratio reverted to its 20th-century average, the yield would be closer to 4%, or more than double the current yield on 10-year Treasury bonds.

The analysis is provided by Motley Fool:
  • For most of the 20th century, companies paid out the majority of their earnings as dividends to shareholders
  • Things began to change around the 1960s, when corporate management decided that earnings could be put to better use, by reinvesting back in the company, or to repurchase stock: the dividend payout ratio began sliding from over 60% to around 50%.
  • The trend sped up over the past two decades: by the late 1980s, just 40% of S&P 500 profits turned into dividends; by 2004, it was 35%; today, it's a record-low 29%

Lower dividends are obviously not a welcome development. If companies aren't spending net income on dividends, what are they spending it on? The answer appears to be: acquisitions and share buybacks. And not always successfully. As the article notes, academic research shows that companies reducing the dividend payout subsequently usually have lower earnings.

However, there is some good news for the current S&P500:
  • corporate America seems to have recovered from the recession
  • real corporate profits are at an all-time high
  • cash flow among S&P 500 companies is at a new record
  • non-residential business investment is approachng to pre-recession levels
  • average chief-executive compensation has increased

I don't know of any similar analysis of the FTSE100 but, inevitably, it tends to follow the US trends as well.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I read only a little of this when the careless grammar stopped me cold. You wrote "Income in the form of dividends are an important feature of the DIY Income Investor approach." The subject is "income" so the verb needs to "is", not "are". Carelessness like this and disrespect for readers, at least for careful readers, tells me not to trust you with any decision pertaining to my income.

    1. Ha ha! Quite right Ted. But maybe look past the poor grammar at the main message>