Background: The S&P 500 is an index that has consistently grown across many decades. On the other hand, since the 1940s, the dividend yield has been decreasing. It used to be around 6%, while in recent years, it has been around 1.5%.
Question: Why is the growth of the value of dividends significantly lower than the growth of the value of stocks in the S&P 500?
Sources:
Stock buybacks are an alternative way of returning money to shareholders that is being used instead of dividends. Some reasons to prefer buybacks are:
Each shareholder can choose when to realize income. For example, young investors earning a salary can avoid adding to their income.
Minimizes unnecessarily moving in/out of positions. A dividend is an automatic, periodic cash-out. If the investor does not need the money, they have to log in and buy more stock, potentially paying transaction fees and spending time out of the market for no reason.
Governance. Dividends are sticky and hard to change because investors expect them to be recurring. The market reacts strongly to dividend changes. This creates bad incentives for management and can lead to, for example, companies continuing to pay a dividend even when they need the money elsewhere (and then taking out expensive loans to cover the gap). Or conversely, companies sitting on a slowly growing pile of unneeded cash because management is afraid to increase the dividend (since it is seen hard to reverse).
Why is the growth of the value of dividends significantly lower than the growth of the value of stocks in the S&P 500?
The 500 companies that makeup the index determine if they pay their shareholders dividends, and how much. The index and the fund play no roll in this decision.
In general companies have determined that paying dividends isn't something that their shareholders want and expect. Some companies still pay dividends, and they consider this to be an integral part of their culture. Others have said we can use the money that would have gone to dividends to grow the company.
This lack of dividends was especially true with the rise of tech companies that were founded since the 1970's. They grew the business based on their profits. Sending a portion of their profits to shareholders wasn't part of the plan.
