Here’s a look at the growth of the S&P 500 along with its dividends over the past 20 years. The S&P 500 is the black line and it follows the left scale, the dividends are the blue line and follow the right scale. The two scales are matched up at a ratio of 50-to-1, meaning the dividend yield is exactly 2% when the lines cross.
That’s actually a very lenient standard. To be a better reflection of valuation, I should have set the scales at a ratio of 30-to-1, but I’m not presenting this as an outlook on stock valuations. The point I want to get across is how stable dividends are over time compared with stock prices. The average swing in stock prices is almost exactly five times the average swing in dividends.
It's interesting to see that dividends never bought into the late 90's rally although they were more impressed by the tepid recovery of the middle of this decade (the dividend tax cut surely helped).
As an investor, sometimes it’s to your benefit to ignore stock prices and focus solely on your dividends. That’s money they can’t take back from you. The other nice thing about dividends is that you pretty much know what you’re going to get. The line doesn’t jump around too much.
Stock investing in the 19th century was really about the dividend. Sometimes I think they were a lot smarter than us. The idea of continuously rising capital gains really dates from the 1920s.
One other point about the table: It goes up to the first quarter of 2009. We’ve seen a lot of dividend cuts this year. I’ll update the chart once the latest numbers are in.