Reinvested dividends are a critical part of overall returns in the stock market. The good news: Several large banks — Citigroup , PNC , Goldman Sachs , Bank of New York Mellon , JPMorgan , Wells Fargo and Morgan Stanley — announced dividend hikes on Friday. These moves will likely help propel the S & P 500 dividend payouts to another record in 2023. The bad news: After several years of rapidly increasing dividend payouts, the pace of growth may be slowing. Dividends still growing but the pace is slowing Dividend payouts in the second quarter remained strong, but below the record pace of the first quarter. In the second quarter, $143.2 billion was paid out to investors in the S & P 500, which was 1.9% higher than the second quarter of last year, but below the first quarter’s record $146.8 billion. That puts the dividend payout for the first half of the year at $290 billion, on pace for a second straight record year. S & P 500 dividends: 2023 on track for another record year Q2 2023: $143.2 billion Q1 2023: $146.8 billion Q4 2022: $146.1 billion Q3 2022: $140.3 billion Q2 2022: $140.6 billion Source: S & P Global That averages out to a 1.7% dividend yield, and it follows a record year for both dividends and buybacks in 2022. Who pays dividends? Dividends are on an upswing. Last year 399 companies in the S & P 500 (nearly 80%) paid a dividend. Of that, 333 of them (83%) increased their dividends. Only five decreased their payout. That trend is continuing into 2023. In the second quarter, 55 companies in the S & P 500 increased their dividend, and four initiated a dividend. Only eight decreased their dividend. That is strong, but less than the 132 of those companies that increased their dividend in the first quarter. “It’s typical for more companies to announce dividend increases in the first quarter,” Howard Silverblatt, senior index analyst at S & P Dow Jones Indices, told me. “That’s the time when many companies have their annual shareholder meetings, and there’s no better time to increase the dividend than just before the meeting.” The rest of 2023 could be tougher for dividends While dividends are growing, the pace of growth is slower than recent years. Dividends: Still growing but at a slower pace (Average increase in S & P 500 dividends, year over year) Q2 2023: up 1.9% Q1 2023: up 6.7% 2022: up 10.4% 2021: up 5.8% What’s the issue? Dividends depend on cash flow, which has been strong in recent years. “Companies have been increasing their dividends fairly steadily for the last several years,” Silverblatt said. “Dividends are a cash commitment. Some companies be getting concerned about the economy, consumer health, and margins. The trend is still up, but it’s a slower pace.” Why you should care about dividends Dividends are a critical part of the long-term profits associated with owning stocks. A 1.7% dividend yield may not seem like much, but many investors reinvest the dividends they receive, and the returns are compounded over the years. Since 1926, the S & P 500 has returned an average of 10.2% a year. Of that, 61% of the gain has been due to price increases, while 39% has been due to dividends, assuming the dividend has been reinvested. Total return S & P 500, 1926-2023 Avg. yearly return: 10.3% Price as % of total return: 62% Dividend as % of total return: 38% Source: S & P Global Silverblatt pointed out that a 1.7% reinvested dividend yield is a perfect example of the power of compound interest. “The farther out you go in years, the bigger the returns,” he said.
