Historical dividend growth rates

Figure 1 shows the historical dividend for SP500. The long term historical growth rate for dividends is about 5%. This dividend growth is the main benefit of investing in stocks as opposed to the fixed yield investments such as bonds. The total investment return is the yield plus the dividend growth rate g.  Based on the historical average dividend of 3.9%, the average historical return is r = Y + g = 3.9% + 5% ≈ 9% which is pretty good. Based on the current yield of 2%, the expected long term return is about 7%.

Figure 1: Historical dividends and dividend growth rates for SP500

Unfortunately, the 5% dividend growth is not inflation adjusted and the real dividend growth is significantly smaller as is shown in Figure 2. The long term inflation adjusted dividend growth rate is just over 1%. Moreover, the real dividend has shown intermediate term declines, some lasting over ten years. This is undoubtedly a big disappointment for those that expect stocks to protect them from inflation. The problem, of course, is with all forms of investments: It is difficult to obtain protect the real value of investments during a period of rising inflation. Based on the real growth rate of  g = 1%, the long term real stock market return is k = Y + g = 3.9% + 1.3% = 5.2%; however, the current dividend yield of 2% is well below the historical average of 3.9% and the future long term real return will be around 3%. The expected real return of 3% can be a real shocker to “index investors” who have been lead to believe that they can get 10+% long term returns.
Figure 2: Historical inflation adjusted dividends and dividend growth rates for SP500.

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