By James Mackintosh
The dividend yield on the S&P 500 is on the verge of an all-time low, and dividend investing has proved deeply disappointing.
Blame artificial intelligence. Excitement about the prospects for the new technology has encouraged companies to plow their profits back into capital spending rather than paying them out to shareholders, while boosting interest in stocks whose profits, and dividends, are merely hopes for the distant future.
The result has made the oldest way of picking dividend stocks -- selecting steady payers that increase the "divi" every year -- lag behind the index by the most over three years since the peak of the dot-com bubble in March 2000.
I measured this using the S&P 500 Dividend Aristocrats index, which buys only stocks in the S&P that have increased their dividend every year for a quarter of a century. The idea is that these stocks are conservatively run businesses able to generate cash for shareholders whatever the economy does.
Investors might be reinvesting dividends if they don't need the income. If they want income, there's a problem: Dividends on the S&P are only just over 1% -- and only a whisker above their lowest ever, in 2000. Even the dividend aristocrats only yield 1.3%.
It is important to note that this approach isn't about buying stocks with a high dividend, which is often a sign of a troubled company about to slash its payout. Rather, it is a bet that slow and steady wins the race.
Until the pandemic, steady dividends worked brilliantly. Big Tech stole the limelight in the years of zero interest rates when alternatives such as value stocks were crushed. But the dividend aristocrats managed to beat the wider index, as long as those steady divis were reinvested -- something an ordinary investor can do automatically by updating the settings in their brokerage account.
That hasn't been the case more recently. Even with dividends reinvested, the dividend aristocrats are barely higher than 18 months ago, while half the 20 best-performing stocks this year don't pay divis at all, including the two best, chip makers Sandisk and Intel. Investors who focus on divis have missed the AI boom.
The question for investors: Is this a feature or a bug?
It's tough when you miss out on stunning gains, but steady-as-she-goes investors might be happy if it also means missing out on the huge drops that often follow frothy periods in the market. Exactly this happened during the dot-com bubble and was repeated in the postpandemic bubble in unprofitable tech stocks, when steady dividend stocks went out of fashion, before catching up by the end of 2022.
Since then, though, the S&P's been on fire, while steady dividend payers very much haven't. Last year was truly miserable: The S&P made almost 18%, including divis, while the dividend aristocrats made 7.2% -- less than the total return on a 10-year Treasury. This year started out better, but they fell behind again this month.
A small part of the problem is that the dividend aristocrat index is equal-weighted, but it has done terribly even compared with the equal-weighted S&P, which is itself lagging behind the normal, market-value-weighted index.
The idea behind dividend investing is that the need to pay out each and every year instills financial discipline, preventing expensive flights of fancy by the C-suite. Big takeovers, a new headquarters or heavy spending on the latest fad are great ways to boost the CEO's ego and get headlines, but soak up shareholder money for what often turns out to be a disappointing return.
Add in a requirement to keep paying out through good times and bad and the approach weeds out businesses supersensitive to the economic cycle or in sectors prone to disruption.
In the jargon of investing, these are "quality" companies with a bias against extreme "growth" stocks -- names such as Walmart, Coca-Cola and S&P Global itself. Usually that works out. The danger is that this time is different.
Bulls buying into AI stocks have driven up the shares of many companies that don't even have a 25-year track record, let alone a 25-year record of paying dividends. They're also preparing to welcome three giant, mostly loss-making initial public offerings: SpaceX, OpenAI and Anthropic.
Naturally, dividend investors miss out. Missing out on innovative companies hurts. And if AI proves to be a new industrial revolution, as many believe, investors who look to past dividends for guidance will miss the new companies leading the charge.
If this is a bubble, missing it is exactly the feature a slow-and-steady investor should want. If AI lives up to the hopes of the bulls, dividend investing will be, if not dead, in an even deeper slumber.
Write to James Mackintosh at james.mackintosh@wsj.com
(END) Dow Jones Newswires
May 21, 2026 12:00 ET (16:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments