Why Dividend Reinvestment is Important Even When the Yield is Low

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The current dividend yield of the S&P 500 is 1.90%. The yield has hovered around 2% for many years now. Since the 1990s the dividend yield has declined consistently year over year to reach the current low rates. The following chart shows the dividend yield since 1870:

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Source: multipl.com

However though the yield so low relative to other developed markets, the contribution of dividends to the overall total return over many years cannot be underestimated. In fact, even during the dot com era of the 90s dividends accounted for 16% of the total return of the index. Total return includes both price return and reinvested dividend return. During the 1st decade of the 21st century, dividends amounted to one-fifth of the total return. In the decades before, dividends played a much bigger role in total returns.

The following chart shows the ratio of dividend returns and price returns to total return of the S&P 500 by decade:

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Source: The Power of Dividends, Hartford Funds

From the above article:

Decade By Decade: How Dividends Impacted Returns

Looking at average stock performance over a longer time frame provides a more granular perspective. From 1930–2018, dividend income’s contribution to the total return of the S&P 500 Index averaged 43%. Looking at S&P 500 Index performance on a decade-by-decade basis shows how dividends’ contribution varied greatly from decade to decade.

Dividends played a large role in terms of their contribution to total returns during the 1940s, 1960s, and 1970s, decades in which total returns were lower than 10%. By contrast, dividends played a smaller role during the 1950s, 1980s, and 1990s when average annual total returns for the decade were well into double digits.

Key Takeaway: Just because the dividend yield is low, investors should not NOT avoid dividend stocks or reinvesting dividends. In the long run, dividend reinvestment can be boost total return by a significant percentage.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Dividend Yields by Country 2019: Chart

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As we head towards the end of this year, let’s take a look at which countries had the highest dividend yields at the start of the year. India has the lowest yield and Czech Republic has the highest. The U.S. rate of around 2% is lower than many emerging countries as shown in the chart below:

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Note: The yields shown are based on MSCI indices.

Source:Targeting high dividends: common sense or flawed promise? by Shaun Port, Nutmeg

 

The Top 20 Global Firms by R&D Expenditures 2018

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Innovation is one of the important attribute’s of the world’s leading companies. High investment in research and development (R&D) leads to great innovation. Hence one way to evaluate top quality firms is to focus on their R&D budgets. Firms that lag in innovation are easily left behind in today’s hyper competitive market. Highly successful firms are generally leaders in innovation. For example, a drug firm cannot a global leader without innovation.

With that said, the top 20 firms in R&D are shown in the table below. These firms are from the top 100 MNEs list published in the World Investment Report by UNCTAD.

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Source: The World Investment Report 2019 , UNCTAD

A few observations:

  • The top five global R&D leaders Amazon(AMZN), Alphabet(GOOG), Samsung, Huawei and Microsoft(MSFT).
  • As usual, US firms dominate the list accounting for nearly half of them.
  • All the Top 7 companies are in the tech sector, This shows the importance of R&D in this sector.
  • The pharma sector has five firms in this list with all of them from the US and Europe.
  • Except Huawei all the other companies from the developed world.
  • Firms from developing countries have a long way to go before they can be world leaders in R&D.

Disclosure: No Positions