The dividend yield on the S&P 500 Index is currently a meagre 1.13 per cent and almost as low as the 1.12 per cent dividend yield registered at the market peak in March 2000, a level that preceded a 13-year period of no returns for investors in that index bar the modest dividend itself. Is this a déjà vu moment or are things genuinely different this time?
Let’s start with the basics. Over the long-term the growth in dividends is driven by the growth in earnings which, in turn, is a function of economic (GDP) growth along with any sustained improvement in industry margins themselves driven by business productivity gains, improvements in pricing power, lower interest rates, lower corporate tax rates and any boost from share buybacks.
From 1950 to 2025 inclusive, the S&P 500 Index‘s earnings per share have grown at 6.3 per cent compound per annum. This longer-term rate of growth includes the Internet era and the huge winners it spawned including Alphabet (Google), Meta Platforms (Facebook), Amazon, Microsoft, Netflix, Apple and others.
Dividend growth was modestly lower than earnings growth at 5.5 per cent compound per annum over that same 1950 to 2025 period, which reflects a declining payout ratio (the percentage of earnings paid out as dividends) as companies increased share buybacks in recent decades.
What does stand out in the S&P 500 earnings data covering the 1950 to 2025 period is the pick-up in the pace of earnings growth to 10.0 per cent annually over the last six-year period from 2019 to 2025 (or 11.2 per cent annually, if we include 2026 expected earnings). That rate of growth is almost double the long-term average.
And given that 2019 represented the interim peak in earnings prior to the onset of Covid-19, this higher rate of growth is not off a depressed earnings base.
Two developments appear to have driven above-average earnings growth since 2019. Firstly, in response to the outbreak of Covid, the US government spent heavily. And, despite the fact that Covid-19 is now well in the rear-view mirror, the US government continues to run a sizeable annual budget deficit of 5-6% of GDP. Government spending boosts corporate earnings.
Secondly, massive US investment in the infrastructure required to support artificial intelligence has boosted earnings over the past two years at least and is expected to strongly boost S&P 500 Index earnings growth again in 2026.
But there are risks. Outsized US budget deficits can’t go on forever or US government debt will reach unsustainable levels. So, either the US eventually cuts back on its budget deficits, which should correspondingly reduce corporate earnings, or global bond investors will likely demand higher long-term US interest rates which, in turn, would challenge the valuation investors are willing to pay for US equities.
As the US 10-year bond yield has been stable in the 4.0 to 4.5 per cent range for a while now, investors don’t appear too concerned about this risk at present. Nonetheless, the risk exists.
And in the AI infrastructure boom, the capital expenditures involved are reflected in immediate revenues and earnings for the companies building the infrastructure while many of the companies investing the monies only bear a gradual build-up in depreciation charges. The difference most likely accounts for the surge in S&P 500 earnings in 2025 and earnings forecasts for 2026.
With several of the major tech players racing to win a slice of the AI game, there is a real risk that offerings become commoditised. And commodity offerings rarely generate above-average returns on investment.
Nonetheless, assuming forecast 2026 earnings data are achieved and sustainable, there is room for dividends to play catch up and on our calculations the end 2026 S&P 500 dividend yield could be closer to 1.55 per cent on the same 39 per cent payout ratio that has pertained since the late-1990s.
Assuming the higher dividend yield 1.55 per cent and the long-term average dividend growth rate of 5.5 per cent it would take 21 years for that dividend yield to match the current 4.53 per cent yield on offer from a US 10-year bond, which represents the risk-free alternative.
They say that the bird in the hand is worth two in the bush. In other words, despite the low-ish yield on offer from US 10-year bonds, they may still be offering the better risk/reward option at present. Of course, we’ve been saying for some time that at current valuations investors in US assets, both equities and bonds, could well be facing low returns over the medium-term from here. Until the facts change, we’ll stick with that view!
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In January 2026, GillenMarkets became part of Quilter Cheviot Europe Ltd.
