MW Dividend yields for U.S. stocks are nearing record lows, and investors don't seem to care. Here's why they should.
By Joseph Adinolfi
A rough patch for markets could cause investors to start to miss their dividends, according to one Deutsche Bank strategist
For the first time since 2000, dividend yields for stocks in the S&P 500 index SPX were nearing record lows, according to Deutsche Bank.
Yet investors don't really seem to care, which isn't exactly surprising, according to Deutsche Bank's Jim Reid. Companies shifting away from dividends to share buybacks started off slowly. Dividend yields started to fall as the post-war boom got under way in the late 1950s.
But buybacks really started to boom in the 1980s, encouraged by developments such as the reduction in capital-gains taxes under President Ronald Reagan, Reid said.
Perhaps more important, a regulatory change implemented by the Securities and Exchange Commission in 1982 helped to effectively legalize the practice by providing clear guidelines for companies looking to purchase their own shares. This allowed firms to avoid potential accusations of market manipulation.
The trend of favoring buybacks over dividends really accelerated over the past decade or so.
As growth companies such as technology stocks outperformed, investors increasingly rewarded companies for choosing to reinvest profits back into their businesses.
Judging by the huge gains U.S. stocks have seen on a total return basis over the past couple of decades, the strategy appears to have worked out well, Reid said.
Still, there may come a time where investors start to miss their dividends. Right now, those who are more focused on income can find some of the highest yields since the 2008 financial crisis in the bond market.
Reid rattled off several reasons why investors should be more wary of share buybacks, even as buybacks have been credited with helping drive the rebound in U.S. stocks since the early-April selloff.
The risks, as Reid sees them, are as follows.
-- Buybacks are more discretionary, and as such they can vanish overnight in a downturn. On the other hand, companies are typically more reluctant to cut dividends.
-- Companies typically buy back more of their shares at market tops than market bottoms, Reid said. That means firms aren't necessarily getting the best value.
-- One consequence of buybacks is that they tend to inflate key metrics such as earnings per share, which could make companies look more profitable than they actually are.
-- If they are used by executives to help meet earnings targets in the hopes of boosting their compensation, firms might allocate money to buybacks that might be better put to use by investing in the business.
The upshot? Reliance on buybacks might not be a problem right now. But that could always change.
"So does a near-record low dividend yield matter? Not while companies are flush with cash and happy to repurchase their own stock," Reid said.
"But it does make the U.S. market more high beta. If a downturn hits, buybacks will stop far more quickly than dividends, potentially pulling away a key pillar of market support."
Investors interested in dividend investing have a few options. Value stocks such as Walgreens Boots Alliance Inc. $(WBA.AU)$, Ford Motor Co. (F) and Altria Group Inc. (MO) have some of the highest dividend yields in the S&P 500, according to FactSet data.
There is also the ProShares S&P 500 Dividend Aristocrats ETF NOBL, which tracks an index of S&P 500 members that have consistently increased dividend payouts for at least 25 consecutive years, according to the fund's prospectus.
-Joseph Adinolfi
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July 08, 2025 10:22 ET (14:22 GMT)
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