Dividend Payout Plateau
Yields have slipped, valuations are stretched -- but dividends could well surge mightily once again.
It feels like dividend yields are on a long slide to zero, but there is reason to believe that yields are likely to stabilize or increase from here.
High stock valuations, not declining payouts, are the main factor throttling driving yields. If valuations eventually ease, dividends could come roaring back.
To set the table, a company’s dividend yield is determined jointly by its managers and its investors.
Management and the board decide where to set the cash dividend. Expressed as a fraction of earnings per share, this is called the payout ratio. Investors decide how to value the company’s stock as a multiple of earnings. A high payout ratio combined with a low valuation equates to a high yield. A low payout ratio with a high valuation produces a low yield.
For example, Chevron pays 67% of trailing earnings as dividends, and its price-earnings ratio is about 16, producing a yield of 4.44%. On the other end of the spectrum, Nvidia pays out 1% of trailing earnings, while investors are currently valuing it at 56 times trailing EPS, producing an infinitesimal yield of 0.02%.
Back in 1960, companies in aggregate paid more than 60% of their earnings as dividends. Share buybacks started gaining favor in the 1980s, touched off by regulatory change in 1980. By 1997, more money was going to buybacks than to dividends. A 2003 dividend tax cut did not change that trend. According to S&P Dow Jones, companies currently spend about 50% more on buybacks than they do on dividends.
That is a “gross” figure. Companies also issue new shares through employee options and follow-on stock offerings. Net of new stock issuance, buybacks and dividends are about equal.
From 1960 to 2000, dividend payout ratios dropped by about half.
Since 2000, the average payout ratio has plateaued in the 30-35% range. Earnings volatility causes the payout ratio to look choppy from year to year. Companies typically maintain their dividends during periods of temporary earnings softness.
Looking past the volatility, a graph of the payout ratio over time shows no discernible trend over the past twenty-plus years.
Finally, we come to valuations. The S&P 500 has tripled over the past 10 years, while aggregate earnings have only about doubled. In the process, the S&P’s yield has fallen to 1.2%, which is less than half its 65 year average of 2.8%.
According to data compiled by Professor Aswath Damordaran at NYU’s Stern School of Business, the S&P’s lowest year-end dividend yield since 1960 was 1.1%, set in 1999, a few months before the dot-com crash began in March 2000. It would only take about 8% more market appreciation to set a new record low yield, give or take any meaningful dividend increases or cuts. There’s no guarantee that the old record low holds. Yields could punch right through it and keep dropping.
Despite the dot-com precedent, this doesn’t necessarily signal problems for the market in the immediate future. Certainly some optimism regarding AI is reflected in elevated valuations. Expectations for strong future earnings growth on the back of AI-related productivity gains could mean valuations remain elevated and yields remain low relative to history.
However, robust earnings growth coupled with consistent payout ratios would mean faster dividend growth.
At some point, valuations are likely to revert to historical levels as either the promise of future earnings growth is fulfilled, or it isn’t. Using history as our guide, there is reason to think that dividend yields will ultimately turn higher from here.
This article originally appeared in the October 2025 issue of BetterInvesting magazine and is reprinted with permission.
