Do Dividends Still Matter? What a Record-Low S&P 500 Yield Really Means

Whenever major change occurs, the phrase “it’s different this time” seems to follow. The latest example appeared in last week’s Wall Street Journal in an article discussing dividends. With the S&P 500 yielding a record low 1%, the article effectively implies that dividends may no longer matter. Before accepting that claim, it helps to understand how we arrived here.

 

 

What a 1% S&P 500 Yield Actually Means

The good news is that dividends have not been cut. Instead, prices have simply risen faster than companies have increased their payouts. From March 31, 2025, to March 31, 2026, dividends grew by 5%, while prices climbed 16%.

Over the past century, dividends have increased at an average annual rate of about 6%, only 1 percentage point above the recent pace. Earnings, by contrast, grew 28% over the same 2025-2026 period, far exceeding the economy’s 6% growth rate. Because earnings are ultimately tied to the broader economy, they cannot outpace it indefinitely. Profitability can influence growth over time, but only by a few percentage points. Given the long-term relationship between economic growth and dividends, it seems premature for the Wall Street Journal to suggest that dividends may be becoming obsolete.

Why Dividend Income Still Matters in an AI Market

Investor enthusiasm for AI and technology has pushed dividends into the background. The issue is not that dividends have lagged, but that they lack the short-term excitement of a transformative trend. Still, one point the Wall Street Journal may be overlooking is that investors need income to meet living expenses. When prices rise steadily, income can seem less important, and the wealth effect creates the impression that assets can always be sold to generate cash flow. But if prices fall for an extended period, that effect can quickly reverse.

That leaves two questions worth considering. First, do investors still need income, and will they always need it? This one is easy; the answer is yes. AI will not buy your food or make the house payment. The second one is somewhat more complicated; will companies stay committed to paying dividends?

A few observations suggest the answer is probably yes. Consider Nvidia, today’s leading example of growth and AI enthusiasm. The company recently increased its quarterly dividend from 1 cent to 25 cents. Although that payout remains a small share of quarterly profits, the increase still signals that dividends matter. More broadly, companies are distributing near-record-low portions of their earnings, with payout ratios approaching 30%, compared with an average closer to 50% over the past several decades. This is actually evidence that dividend growth could be even better in the future.

The Wall Street Journal has asked whether this time is different and whether dividends still matter. Shareholders do own the company, and when a business generates excess cash flow, returning some of it to investors makes sense. More fundamentally, people will always need income from somewhere. So yes—dividends still matter.

Observations on the Market No. 419