The Dividend Yield of the S&P 500 Index is the Lowest since the Dot-Com Bubble

Recently, there haven’t been many reasons for dividend-focused investors to celebrate, according to Trivariate Research.

The dividend yield of the S&P 500, currently at 1.15%, is approaching its lowest levels in the past 50 years, notes founder Adam Parker in a memo this week. He points out that the only time it fell lower was during the tech bubble, hitting a bottom of 1.09%.

He suggests that the blame can be attributed to mega-cap technology companies dominating the index. Tech stocks are the largest group, making up 35% of the S&P 500. Enthusiasm around artificial intelligence has repeatedly pushed major tech names like Nvidia and the S&P 500 itself to new highs this year, even though they have recently experienced some volatility.

The percentage of companies paying dividends is 56%, which is largely unchanged over the past 25 years, Parker writes. Thus, it’s clear that the largest companies by market capitalization with low or no dividends are driving the current environment.

For example, Nvidia offers a negligible yield of 0.02%, Microsoft yields 0.76%, and Alphabet 0.29%.

Moreover, dividend-paying stocks are going through their third-worst period in 25 years due to the rise of companies with zero or very low dividend yields, he adds. Traditionally high-yield, defensive sectors like consumer staples, telecoms, and pharmaceuticals have been weak, Parker notes.

Still, concerns about valuations and the direction of Federal Reserve policy have recently impacted tech stocks. The broader market rebounded on Friday after a heavy sell-off in the previous session.

Nvidia, which closed lower on Thursday despite impressive reported results, saw a slight decline on Friday as well. The chipmaker’s shares have risen 33% year-to-date but are down nearly 12% for the current month.

Parker’s ideas for long dividend positions

When it comes to dividends, investors can follow different strategies—focusing either on high payouts or consistent growth.

According to Parker, since the post-Covid period, companies that increase their dividends have slightly outperformed the sector average. He notes that this works best in real estate, utilities, and energy.

Specifically, among companies that raise their payout ratio, those increasing dividends from the lowest quintile—below 16.2%—tend to outperform their sector average over the following two years, Parker says.

In this context, he has compiled a list of long ideas focused on companies that have recently announced dividend increases. They fall within the lowest payout-ratio quintile and, according to Parker, are positioned to raise dividends again in the future.

Here are some of the names on that list.

Cinemark Holdings raised its quarterly dividend by 12.5% earlier this month, with the changes taking effect on December 12 for shareholders of record on November 28. Its current yield is 1.24%.

The company reported third-quarter revenue above expectations, although its profit remained below forecasts. It also announced that it has paid down debt accumulated during the pandemic. In addition to the dividend increase, Cinemark said it will repurchase $300 million of its shares.

According to FactSet, the stock has an average analyst rating of “overweight” and nearly 16% upside potential to the average target price. Cinemark has lost about 5% of its value year-to-date.

Capital One Financial is also among Parker’s long ideas. The financial company recently raised its quarterly dividend to $0.80 from $0.60—a more than 30% increase—payable on December 1 for shareholders of record on November 17. The stock currently yields 1.58%.

Capital One’s third-quarter earnings also exceeded analyst expectations, reaching $4.83 per share. FactSet survey analysts had expected $4.38 per share.

The stock has an average analyst rating of “overweight” and 26% upside potential to the average target price. Year-to-date, the share price has risen nearly 17%.

Finally, Cheniere Energy announced a 10% increase in its quarterly dividend—to $0.55 per share from $0.50. The stock currently yields 1.07%.

Cheniere has an average analyst rating of “buy” and 32% upside potential to the average target price. The stock is down more than 4% year-to-date.