Summary
Dividend income is often overlooked amid gyrations in the stock market. Consider that in 2024, market bulls were boasting about 24%-plus S&P 500 returns. No one was very focused on the broad market index’s 1.2% dividend yield. But dividends are an important element of return, and 2025, for a while, was bearing that out. Through May, the S&P 500 was up a thin 1.1%; without dividends, there was essentially no return at all. Indeed, dividend income accounted for 42% of the total return of the S&P 500 between 1930 and 2012, according to Hartford Funds. And that’s just the average. In some of those decades, dividends accounted for more than 50% of total returns and even 100%. More recently, dividends have accounted for a smaller portion of returns, at around 15%-20%. Not for nothing, in 2022, dividend payments softened the blow when most market indices turned bearish as the Federal Reserve hiked interest rates. We saw that pattern in 2018 as well. Not all dividends are equal, though, and it is important to understand the difference between the two main investment categories: high-yield stocks and dividend-growth stocks. High-yield stocks typically have dividends that pay out in the 5%-8% range. Though the income appears attractive, the share prices of high-yield stocks may be at risk. Indeed, if interest rates drift higher, risk-averse equity investors could be drawn to the relative safety of bonds and may sell their high-yield stocks. In addition, it is worth noting that a yield in the 7%-10% range could signal a company is struggling and the dividend is in jeopardy. Former blue-chip companies such as 3M, General Electric, Boeing, and Kraft Heinz all cut their high dividends in the past few years. Lastly, high dividend payouts likely constitute a sizable percentage of the cash a company earns, leaving little behind for management to d
