S&P 500 Dividends Just Hit an All-Time Low Going Back to the 1800s - Here's What Retirees Need to Know

S&P 500 dividend yield has dropped to roughly 1.1%, far below typical historical ranges of about 2% to 3.5%. A $500,000 portfolio in an S&P 500 index fund at 1.1% would generate about $5,400 per year in dividends, compared with about $15,000 at a 3% yield. Dividend yield is a payout-to-price ratio, so rising share prices without matching dividend growth compress the yield. The index has become concentrated in mega-cap technology companies that reinvest more than they distribute, contributing to the lower yield. In contrast, 30-year Treasuries yield about 5%, producing about $25,350 annually on $500,000 with principal risk reduced if held to maturity.

"“The dividend usually fluctuates between 2 and change, and sometimes up to 3.5% in normal market conditions.” If your retirement income plan assumes the S&P 500 will throw off the 2% to 3% it historically paid, you are budgeting against a yield that no longer exists. A $500,000 portfolio invested in an S&P 500 index fund yielding 1.1% generates about $5,400 a year in dividends. The same portfolio at a 3% yield would generate $15,000. That gap is the entire problem."

"“What they're paying out versus what the value or the cost of the share” is how he described it. When share prices race ahead of dividend growth, yield compresses. That is exactly what has happened. Look at what the S&P 500 has done. SPDR S&P 500 ETF Trust ( NYSEARCA:SPY | SPY Price Prediction) is up 28% over the past year and 80% over five years, trading near $746. Meanwhile, the index has become a concentrated bet on companies that reinvest rather than distribute."

"“Mega-cap tech does not pay 3% yields. That is why the headline index yield collapsed.” NVIDIA ( NASDAQ:NVDA) alone is 8% of SPY, Apple ( NASDAQ:AAPL) is 7%, and Microsoft ( NASDAQ:MSFT) is 5%. The income side then contrasts with fixed income: the 30-year Treasury yields about 5% and the 2-year yields about 4%."

"Now compare the income side. The 30-year Treasury yields about 5% and the 2-year yields about 4%. A retiree holding $500,000 in 30-year Treasuries collects roughly $25,350 in annual interest with zero principal risk if held to maturity. Holding the same $500,000 in the S&P 500 at 1.1% pays about $5,400 and exposes the principal to full equity drawdowns."

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