Dividends play an important role in the total return investors receive from their investment portfolios. The formula for total return is the sum of stock price change plus dividends (total return = price change + dividends). When a company pays a dividend, it is returning a portion of the profits it earned to its shareholders via a cash distribution.
Investors often view dividends as both a reflection of the company’s past performance and its potential for future growth. In 2024, among the constituents of the S&P 500 Index, there were 407 companies which distributed a cash dividend to shareholders. In the decade between 2010 and 2020, dividend paying S&P 500 stocks had an average annual total return of +14.05% versus +13.12% for non-payers. During that period, the dividend contribution to total return rate was 17%. Since 2020, a group of growth-oriented, large-cap technology companies (think “magnificent 7”) have dominated the S&P 500 and resulted in an overall lower dividend contribution rate of just 12%.