Dividends are a large portion of total return
Not only have investors focused increasingly on dividends as a form of income, dividend investing has also benefited from the tailwinds of a gradually changing economy. Over the past decades, companies have grown more capital-light while maintaining their free cash flow margins. This provides them with more leeway to increase their dividend payout. Indeed, over the last 40 years, the average payout ratio has risen from around 35% to nearly 50% in mid-2016 – behavior which the market has rewarded.*
With a growing dividend payout as well as currently low nominal interest rates, the dividend yield has become a more important part of equities’ total return. Over the 40 years to end 2010, dividend returns accounted for about a third of the non-US developed market total return. Since 2010 that figure has risen closer to half*. In the US, dividends are less popular so companies often return capital to shareholders via buyback programs.