How important are dividends in the S&P 500's total returns?
In a word, very. Dividend income has represented roughly one-third of the total return on the Standard & Poor's 500 index since 1926.*
S&P, the portion of total return attributable to dividends has ranged from
a high of 53% during the 1940s--in other words, more than half that decade's
return resulted from dividends--to a low of 14% during the 1990s, when
the development and rapid expansion of the Internet meant that investors tended to focus on growth.*
And in individual years, the contribution of dividends can be even more dramatic. In 2011, the index's 2.11% average dividend component represented 100% of its total return, since the index's value actually fell by three-hundredths of a point.** And according to S&P, the dividend component of the total return on the S&P 500 has been far more stable than price changes, which can be affected by speculation and fickle market sentiment.
Dividends also represent a growing percentage of Americans' personal incomes. That's been especially true in recent years as low interest rates have made fixed-income investments less useful as a way to help pay the bills. In 2012, dividends represented 5.64% of per capita personal income; 20 years earlier, that figure was only 3.51%.*
All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Investing in dividends is a long-term commitment. Investors should be prepared for periods when dividend payers drag down, not boost, an equity portfolio. A company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.
*Source: "Dividend Investing and a Look Inside the S&P Dow Jones Dividend Indices," Standard & Poor's, September 2013
**Source: www.spindices.com, "S&P 500 Annual Returns" as of 3/13/2015