Stocks Down, Yields Up

On this week’s Animal Spirits we discussed dividend yields in various stock markets around the globe and how they provide a silver lining during a stock sell-off:

Here’s the chart we referred to on the show:

Stocks have popped around 10% or so since the massacre on Christmas Eve but this is a nice illustration of the upside involved in bear markets. When prices fall, yields go up.

That means any new money you’re putting to work in the stock market is being invested at higher yields than you would have received earlier this year. The same principle applies when you rebalance your portfolio into some of the recent pain.

It may not feel like it but this is actually a good thing for most investors.

When all of the short-term market talk centers on individual stocks and daily moves it’s easy to overlook simple things like cash flows through dividend payments. And while dividend yields are lower in the U.S. than they were in the past1, the growth in dividends over time is an underappreciated force in long-term compounding.

Take a look at the annual growth rate in dividends on the S&P 500 every year going back to 2010:

So while the S&P 500 was down more than 4% in 2018, dividends were actually up almost 10%. And dividends have more or less tracked the stock market’s growth in this time as well. The S&P 500 is up 11.6% annually on a total return basis from 2010 to 2018, not much higher than the 10.2% annual growth rate in dividends.

In a world awash in low-yielding fixed income assets, this is a phenomenal growth rate in income for investors looking for yield. It can’t stay this high forever, but dividend growth has outpaced the rate of inflation historically.

Obviously, dividend payments are not the same thing as interest payments on bonds and dividends certainly can, and likely will, fall during a recession. But where else could you possibly find 10% annual growth on your income payments like this?

Sometimes people forget that putting money into the stock market gives you an ownership stake in actual businesses that produce regular cash flow which they pay out to their investors.

When stocks go down, yields tend to go up. But even when stocks go up, dividends are rising right along with them.

Further Reading:
Stock Market Yields Are Higher Than You Think

Now here’s what I’ve been reading lately:

1I’m ignoring share buybacks here which are a huge reason for lower dividend yields in the U.S. More on this in an upcoming post…

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.