How Dividend Payments Can Help Build Wealth as Interest Rates Change

A famous investor named Jack Bogle once said that “successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s—and, for that matter, the world’s—corporations.” This advice matters today because owning stocks isn’t just about watching their prices go up over time. It’s also about collecting the dividend payments that companies give to their shareholders as they make more money.

Right now, stock prices are close to the highest they’ve ever been. At the same time, dividend yields (the amount of money you get from dividends compared to the stock price) are very low – only about 1.3% for the S&P 500 index over the next year. The last time dividend yields were this low was in 2000 during the dot-com bubble. The Federal Reserve’s decisions about interest rates also affect how investors can set up their portfolios to earn income today.

Many people think dividends are boring, especially when compared to fast-growing stocks that get lots of attention in the news. But dividend payments shouldn’t be ignored in your investment plan. These payments grow over time through compounding and can give you steady income, especially when stock prices are jumping around a lot. Companies that pay dividends and also see their stock prices rise over many years can give investors two benefits: regular cash payments and long-term wealth growth.

Today’s market shows how companies have changed the way they use their money and what investors care about most over many decades. How can investors find the right balance between stock price growth and dividend income in their portfolios today?

Investor attitudes toward dividend payments have changed over the past 100 years

The importance of dividends in investing has shifted dramatically over the past century. For most of the 1900s, dividends were a main way people made money from stocks, with yields (the percentage return from dividends) often reaching 5% to 7%. Investors bought stocks similar to how they might buy bonds today – mainly for the regular income they provided. Companies were expected to pay and increase their dividends to show they were financially healthy, and rising stock prices were often less important than dividend income.

This started changing as investors became more interested in technology companies and rapid growth. The dot-com boom of the 1990s reduced focus on dividends even more, as fast-growing tech companies not only put their money back into growing their businesses, but were often expected to not pay dividends. Stock buybacks (when companies buy back their own shares) also became more popular as a more tax-friendly way of giving money back to shareholders compared to dividends.

Today’s low dividend yields show this change. As the chart demonstrates, technology-related sectors like Information Technology, Consumer Discretionary, and Communication Services have the lowest dividend yields at 0.6%, 0.7%, and 0.8%. These sectors include the Magnificent 7 stocks, which typically pay small dividends or none at all.

On the other hand, sectors like Real Estate, Energy, and Utilities that have traditionally focused on providing income offer yields above 3%. This shows that higher dividends are available if you look at different parts of the market.

This pattern of lower dividend yields for the overall market isn’t necessarily bad since it reflects different market conditions and business approaches that can help investors in different ways. However, it does show why it’s important to understand what dividends mean for companies, investors, and investment portfolios.

Company decisions and interest rates influence how attractive dividends are

When companies make profits, they can use that money in two main ways: put it back into growing their business or give cash back to shareholders through dividends. In theory, companies should return cash to investors when they already have enough money for good investment opportunities or when their business model is specifically designed to generate income for shareholders, such as REITs (real estate investment trusts – companies that own income-producing real estate).

But dividends do more than just return extra cash. Many companies pay steady dividends to attract investors and show they’re financially stable, especially when they can prove they’re consistently growing these payments over time. This dividend growth acts as a sign of company health and shows that management is confident about future earnings, not just about providing income.

Interest rates and the Federal Reserve’s policies also affect how attractive dividend-paying stocks are. When Treasury bond yields are higher than dividend yields, government bonds become more appealing than dividend stocks. Right now, with 10-year Treasury bonds paying around 4.1%, government bonds offer much higher income than the overall stock market. As the Fed continues to lower interest rates, this situation could change.

The chart shows a related idea called the “earnings yield,” sometimes called the “equity risk premium.” This measures how attractive stocks are compared to Treasury bonds. The downward trend in recent years happened because stock prices climbed to new highs while interest rates also rose. The fact that interest rates have stayed in a similar range recently is why this relative earnings yield has stabilized this year.

Dividends are an important factor for investors to consider

For investors, dividends are a key part of the total money earned from a portfolio. According to Standard and Poor’s, dividends have provided 31% of the total return for the S&P 500 since 1926, while rising stock prices provided 69%.¹ Today, most everyday investors seem to focus mainly on stock prices, except when they need portfolio income, such as people getting close to retirement or already retired.

The chart shows that $1 invested in stocks in 1926 grew to about $18,000 by 2025, showing the power of compound growth (earning returns on your returns) over long periods. This growth came from both dividends and rising stock prices, but the specific mix changed across different time periods. During some decades, dividends provided most of the return. In others, stock price increases were more important. What stayed the same was the importance of remaining invested through various market cycles, regardless of what drove returns.

For investors approaching or in retirement, the focus naturally shifts toward earning current income. However, this doesn’t necessarily mean putting all your money in high-dividend stocks. The risk of “yield chasing” – focusing only on the highest-paying investments – is that it can lead to poor diversification (not spreading your money around enough), putting too much money in unsustainable companies and industries, and reduced growth potential for today’s longer retirements.

Therefore, investors should find the right balance of dividends and growth for their financial goals. This “total return” approach helps ensure that portfolios can generate appropriate returns through various market conditions, whether through dividends, capital appreciation (rising stock prices), or both.

The bottom line? While dividend yields are near historic lows, they continue to play an important role in investment portfolios. Investors should focus on both rising stock prices and dividend payments as they work toward their financial goals.

https://www.spglobal.com/spdji/en/documents/research/research-sp500-dividend-aristocrats.pdf