This advice matters today because owning stocks gives you two benefits: the stock price can go up over time, and companies pay you cash through dividends as they make more money.
Right now, stock prices are very high and dividend yields (the cash payments you get from owning stocks) are very low. The S&P 500 is expected to pay only about 1.3% in dividends this year. The last time dividend payments were this small was in 2000 during the dot-com bubble. When the Federal Reserve (the Fed) cuts interest rates, it changes how investors can earn income from their investments.
Many people think dividends are boring compared to fast-growing stocks that get lots of attention. But dividend payments are actually very important for your investment portfolio. These cash payments add up over time and give you steady income, especially when stock prices go up and down a lot. Companies that both pay dividends and see their stock prices rise over many years can give investors two good things: regular cash payments and growing wealth over time.
Today's market shows how companies and investors have changed their thinking over many decades. How can investors balance both rising stock prices and dividend payments in their portfolios today?
For most of the 1900s, dividends were a main way people made money from stocks, often paying 5% to 7% per year. Investors bought stocks similar to how they might buy bonds today - mainly for the regular income they provided. Companies were expected to pay and increase their dividends to show they were financially healthy. Stock price growth was often less important than the dividend income.
This started changing as investors became more interested in technology companies and fast growth. The dot-com boom of the 1990s reduced focus on dividends even more. High-growth tech companies not only put their money back into growing their business, but investors actually expected them to not pay dividends. Companies also started buying back their own stock more often because it was more tax-friendly than paying dividends.
Today's low dividend payments reflect this change. As the chart shows, technology sectors like Information Technology, Consumer Discretionary, and Communication Services pay the smallest dividends at 0.6%, 0.7%, and 0.8%. These sectors include the Magnificent 7 stocks, which generally pay low dividends or none at all.
On the other hand, sectors like Real Estate, Energy, and Utilities that have always focused on providing income offer yields above 3%. This shows that higher dividend payments are available if you look at different parts of the market.
Lower dividend yields for the overall market isn't necessarily bad since it shows different business strategies that can help investors in unique ways. However, it does show why it's important to understand what role dividends play for companies, investors, and portfolios.
In theory, companies should give cash to investors when they already have enough money for good investment opportunities or when their business is specifically designed to generate income for shareholders, like REITs (real estate investment trusts).
However, dividends do more than just return extra cash. Many companies pay steady dividends to attract investors and show they are financially stable, especially when they can show consistent growth in these payments over time. Growing dividend payments signal that the company is healthy and management believes future earnings will be strong.
Interest rates and the Fed's policies also affect how attractive dividend-paying stocks are. When Treasury bond yields (what the government pays you to lend it money) are higher than dividend yields, government bonds become more attractive. Right now, with 10-year Treasury yields around 4.1%, government bonds pay much more income than the overall stock market. As the Fed continues to cut interest rates, this situation could change.
The chart shows something called the "earnings yield," sometimes called the "equity risk premium." This measures how attractive stocks are compared to Treasury bonds. This measure has been going down in recent years because stock prices have climbed to new highs while interest rates have been higher. Since interest rates have stayed in a range more recently, this measure has stabilized this year.
According to Standard and Poor's, dividends have provided 31% of the total returns for the S&P 500 since 1926, while rising stock prices provided 69%.1 Today, most everyday investors focus mainly on stock prices unless they need portfolio income, such as people who are near retirement or already retired.
The chart shows that $1 invested in stocks in 1926 grew to about $18,000 by 2025, showing the power of compound growth (when your money grows and then that growth also grows) over long periods. This growth came from both dividends and rising stock prices, but the mix was different in different time periods. During some decades, dividends provided most of the returns. In others, rising stock prices were more important. What stayed the same was the importance of staying invested through different market cycles, no matter what drove the returns.
For investors approaching or in retirement, the focus naturally shifts toward generating current income. However, this doesn't necessarily mean putting all your money in high-dividend stocks. The risk of "yield chasing" - focusing only on investments with the highest dividend payments - is that it can lead to poor diversification (not spreading your money around enough), putting too much money in companies and industries that can't sustain their payments, and reduced growth for today's longer retirements.
So investors should find the right balance of dividends and growth for their financial goals. This "total return" approach helps make sure portfolios can generate appropriate returns in different market environments, whether through dividends, rising stock prices, or both.
1. https://www.spglobal.com/spdji/en/documents/research/research-sp500-dividend-aristocrats.pdf