Something strange has happened to the stock market over the past few years.
The S&P 500’s dividend yield has dropped to 1.23% – the lowest level we’ve seen since 2001.
And it’s not just because stock prices have gone up. The market has fundamentally changed in ways that many income-focused investors haven’t fully grasped yet.
Let me explain why this matters and what you can do about it.
Think back to the old days, when you could build a solid retirement portfolio around blue chip dividend stocks. Companies like Coca-Cola, AT&T, and Procter & Gamble were the backbone of many income portfolios.
Those days are fading fast.
The S&P 500 looks completely different today than it did just a decade ago. Technology companies, which made up about 18% of the index in 2014, now account for more than 30%. Meanwhile, consumer staples and utilities, two mainstays for dividend investors, make up just 5.4% and 2.4%, respectively.
This shift toward tech has dramatically changed what it means to be a dividend investor.
Why? Because tech companies typically pay very small dividends – if any at all. Instead of paying out their excess cash to shareholders, they prefer to reinvest it into growth or buy back shares.
Even more telling is what’s happened to so-called high-dividend strategies. If you buy a high-dividend ETF today, you might be surprised to learn that “high” now means about 2.7%. That’s a far cry from the 4% to 5% yields these strategies used to deliver.
Think about that for a minute. Even if you explicitly focus on dividend-paying stocks, you’re still looking at yields well below what you can get from a simple Treasury bond these days. For the first time in over a decade, bonds are actually paying more than dividend stocks.
But here’s the real kicker: To get those higher dividend yields, you often have to give up exposure to the market’s fastest-growing companies. Most dividend funds have only tiny allocations to technology stocks – the very sector that’s been driving much of the market’s growth and innovation.
This puts income investors in a tough spot. Do you chase yields and potentially miss out on growth? Or do you accept lower yields in hopes of capturing bigger capital gains?
There’s no easy answer, but there is a smarter way to think about it. Instead of focusing solely on dividends, investors need to look at their total return potential – combining modest dividend yields with bond income and potential price appreciation.
Consider this three-pronged approach:
- Build a core portfolio in dividend payers with strong fundamentals and growing payouts.
- Include a very healthy dose of bonds, which are now offering some of the highest yields we’ve seen in a decade.
- Add a strategic allocation in growth stocks (yes, even those tech companies with little to no yield).
This might feel like heresy to investors who primarily seek out dividend income. But the market has changed, and our strategies need to change with it. With corporate bonds yielding over 5% and Treasurys above 4%, bonds can now provide the steady income that dividend stocks used to deliver.
Of course, change is the nature of investing. As market conditions shift, so should your portfolio strategy. Adaptability is essential to long-term success, so don’t let old rules of thumb keep you from adapting to new market realities. The days of exclusively living off of stock dividends may be over, but that doesn’t mean you can’t build a solid income portfolio.
Remember, successful investing isn’t about clinging to what worked in the past – it’s about understanding how markets evolve and adjusting your strategy accordingly. Today’s market may not be as friendly to traditional dividend investing as it once was, but it still offers plenty of opportunities for those who are willing to keep an open mind.