Dividends have provided a moderating effect on total return of the S&P 500, and when accumulated over long periods, they account for a very high portion of total return.
In the chart below, earnings, dividends and index prices are each indexed to their 1912 Q1 values.
Note that the dividends accumulate after-tax and compound, whereas the price of the index is what it is. These charts do not show the effect of the summation and compounding of dividends received.
click image to enlarge to full size
We don't have a good figure for historical dividend taxes and did not take the time to review the taxes on dividends for each year since income taxes were instituted. They have been fully tax exempt, and massively taxed, and in-between at various times.
For ballpark purposes, if we assume a 50% tax rate and a zero after-tax reinvestment rate in cash (quite conservative, we would think), the sum of after-tax dividends over 100 years, is about the same as, if not greater than, the current index price level.
Robert Shiller's S&P 500 data file presents an annualized dividend amount for each quarter. Sum those for 100 years, and then divide by 4. That number is 1697.
The point is not to try to be exact, or to suggest that we should invest today with an expected 100 year holding period. The point is that dividends are big part of long-term returns, and when reinvestment is considered they are big deal.
In early years, when companies tended to pay a larger percentage of earnings as dividends, the dividend payment stream was more volatile. In later years, when managements paid a lower percentage of earnings, and tend to think of dividends as a commitment more than a simple distribution, the payment stream smoothed.
In 2009, dividends cratered as banks suspended payments entirely. They had been a major source of overall dividends.
With banks beginning to restore dividends, and not much in the way of bank dividend cuts on the near-term horizon; and with corporate profits and balance sheets in good shape, the prospects for dividends look pretty good.
Disclosure: QVM has positions in SPY in some managed accounts as of the creation date of this article (March 24, 2012).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.