The Decrease in Dividend Payments of S&P 500 Companies Over the Past Two Decades

Over the past two decades, a noticeable shift has occurred in the dividend policies of S&P 500 companies. While dividends have historically been a key way for companies to distribute profits to shareholders, there has been a significant decrease in the overall dividend payments of these companies, especially in comparison to previous decades. This decline has raised questions about the evolving priorities of businesses, changes in investor preferences, and broader macroeconomic trends. This research note aims to explore the factors behind the decrease in dividend payments among S&P 500 companies over the past 20 years, the impact on investors, and the potential implications for the future.

What have dividends meant historically to investors? 

Dividends have long been a hallmark of well-established companies. Historically, mature companies in sectors like utilities, consumer goods, and financials have been generous dividend payers, seeing these payments as a way to share profits with investors. The S&P 500 Index, which represents a broader view of the U.S. economy, has traditionally reflected this trend, with many large corporations offering regular dividend payments to their shareholders.

The dividend payout ratio (the percentage of earnings paid out as dividends, calculated with earnings per share / dividend per share) has fluctuated over time, but the general trend has been one of consistent increasing dividends for much of the 20th century. However, by the early 21st century, dividend payments among S&P 500 companies began to show signs of decline, and this trend has accelerated since the global financial crisis of 2007-2008.

A brief digression on the legal reasoning behind dividends…

The basis of corporate law lies in the differentiation between the two primary forms of business vehicle; the corporation and the partnership. In the essential corporate law textbook by Clark there is a good example of the benefits and detriments of these two structures. I will leave your further research of that to your own discretion. We, at the BYCIG, try to endow our financial education with some forms of legal education in the corporate field. Historically, partnerships have been the preferred form of business. Partnerships essentially are a coalition of owners conducting and managing business and taking proportional shares of profit relative to their share of upfront investment or some other breakdown disclosed in the applicable legal documents and operating agreements. This is fundamentally different from corporations in form but not in theory. Dividends are intended to be the exact same concept of taking a share of the profit relative to your share of ownership. Dividends are an investor in a public company’s claim on its profits. There is grounds for concern when such corporations, which were initially formed on the basis of their having a “legal personality” that makes them essentially a human under the law, seem to have seized profits that you have a rightful claim on, and directed those profits back towards himself (he being the legal personality of the given corporation). The decrease in dividend issuances by corporations of the last two decades isn’t something to fear but is something to note when trying to understand how the motivations for large corporations, and their relationships with shareholders, is constantly changing. 

Some reasons for these decreases: 

Several factors contribute to the decrease in dividend payments among S&P 500 companies over the past two decades:

1. Shift Toward Share Buybacks: One of the primary reasons for the decline in dividends is the increasing focus on share buybacks. Share repurchase programs allow companies to buy back their own stock, reducing the number of shares outstanding, which increases the value of remaining shares. This practice became particularly popular in the 2010s as companies, flush with cash and seeking to return value to shareholders, found buybacks to be a more tax-efficient way to do so compared to dividends. While buybacks benefit shareholders in a similar way to dividends, they do not offer the same consistent, regular income stream.

Share repurchases have surged in popularity, especially among large tech companies, which are often growth-oriented and have less need for large dividend payouts. Between 2004 and 2018, the amount spent on buybacks in the S&P 500 Index exceeded the amount spent on dividends in most years.

2. Growth Orientation of Tech Companies: The increasing dominance of technology companies in the S&P 500 Index has also played a role in reducing overall dividend payments. Many of the largest tech companies, including Apple, Amazon, Google, and Facebook (Meta), are focused on reinvesting their profits into growth opportunities rather than distributing those profits to shareholders. These companies prioritize innovation, research and development (R&D), and expansion, often foregoing dividends in favor of using cash to fuel further growth.
   While some tech companies like Apple and Microsoft have initiated dividend payments in recent years, the overall trend in the tech sector has been one of limited dividend payouts, especially among high-growth firms in industries like software, e-commerce, and biotechnology.
3. Increased Corporate Leverage: Over the past two decades, many companies in the S&P 500 have taken on greater levels of debt to finance operations, acquisitions, and stock buybacks. Increased leverage means companies may feel less financially stable and less inclined to commit to high dividend payments, especially in times of economic uncertainty. As companies focus on reducing debt or improving their financial position, they may opt to lower dividend payouts or eliminate them altogether to conserve cash.
4. Economic Uncertainty and the Financial Crisis: The global financial crisis of 2007-2008 had a lasting impact on corporate dividend policies. During the crisis, many companies cut or suspended their dividend payments as they struggled to maintain liquidity and weather the storm. In the aftermath, even as many companies rebounded, there was a shift toward greater caution. Companies became more conservative with their dividend policies, preferring to retain earnings for debt reduction, capital expenditures, or investments in growth.
   This conservatism has persisted even during periods of economic recovery. The uncertainty created by global events like the trade war between the U.S. and China, the COVID-19 pandemic, and other geopolitical tensions has led many companies to be more cautious in their approach to dividend payments.
5. Tax Considerations: Tax policy changes have also played a role in the decrease of dividend payouts. While dividends are taxed at a higher rate than capital gains in the U.S. (at least for individual shareholders), stock buybacks generally do not trigger immediate taxes. This tax advantage has incentivized companies to prefer repurchasing shares over paying dividends. For companies that wish to return value to shareholders, share buybacks provide a more tax-efficient mechanism, especially for investors in higher tax brackets.
6. Change in Investor Preferences: The decrease in dividend payments has also been linked to a shift in investor preferences. In recent years, many investors have become more focused on capital appreciation rather than income from dividends. The rise of passive investing, particularly through exchange-traded funds (ETFs) that track the S&P 500, has meant that investors are less concerned with dividend income and more interested in the long-term growth potential of companies. This shift has reduced the pressure on companies to pay dividends, particularly if they can demonstrate solid growth prospects.

What’s the impact of this? 

The decline in dividend payments has had significant implications for both companies and investors:

1. Impact on Shareholder Returns: For long-term, income-focused investors, the decrease in dividends has been a concern. Dividends have historically been an important component of total shareholder return, especially for retirees or those seeking stable income streams. While share buybacks can lead to higher stock prices over time, they do not provide the same predictable cash flow that dividends do. As a result, investors who rely on dividend income may find the shift to buybacks less attractive.
2. Company Financial Strategies: The focus on share buybacks has allowed companies to manage their capital structures in a way that boosts stock prices in the short term, which can be especially appealing to executives with stock-based compensation. However, this strategy has also raised concerns about the long-term sustainability of such practices. Critics argue that companies may be prioritizing short-term stock price gains over long-term investment in R&D, worker wages, and other key areas that support sustainable growth.
3. Broader Economic Implications: The trend toward lower dividend payouts and increased share buybacks has also been linked to broader concerns about income inequality and the distribution of corporate profits. While shareholders may benefit from stock price appreciation, workers may see less benefit, as companies increasingly favor buybacks over wage increases or reinvestment in their workforce. This has contributed to ongoing debates about the role of corporations in addressing social and economic inequality.

Thanks for reading this BYCIG note and stay engaged for future insights and research coming from the BYCIG team.