For those of you keeping score, the S&P 500 Index managed to eke out in 2020 a small increase in the index dividend, 0.07%, over 2019. $58.24 went to $58.28.
That’s pretty impressive given the economic circumstances and the reality that dividend-focused products had a tough time in 2020 actually collecting their dividends. The economic downturn affected the Old-Economy dividend payers more than the New-Economy work-from-home companies.
So bully for the S&P 500 Index. But it is important to put that achievement in context. Growing the dividend off such a low base isn’t really much of an achevement. The S&P 500 Index entered the year with a 1.74% yield and what would be (but could not be known) a 1.76% prospective yield. It ends the year with a 1.56% trailing yield (due to the market’s sharp rise against a basically flat dividend). The prospective 2021 yield is anyone’s guess, but even assuming a resumption of dividend growth in 2021, it is unlikely to be greater than 1.7%.
Let’s translate that into dollars and cents. Take a $100 investment. In 2019, the dividend was $1.74. In 2020, it was $1.76. Now compare that with a “proper” equity income portfolio that yields, say, 4% after all fees. That translates into $4.00 is income. Let’s say that portfolio struggled in 2020 and the dividend declined 5%. Its distributions dropped to $3.80. That’s unfortunate, but the scale difference here is important. The S&P 500 Index is such a low yielding platform that it doesn’t really matter that its dividend goes up or even up sharply in any given period. And the opposite is true of high-yielding vehicles. Even in a less successful year, their income generation is still likely to be so much greater than the market’s that they are just not comparable figures.
In a low-yielding market, generating a meaningful income stream involves taking risks. But the reward for the income investor is, well, income. That’s the point of the exercise.