The Decline of S&P 500 Dividends: Why Active ETFs Are Key for Income Investors

It turns out that the yield on the S&P 500 is at its lowest point in nearly two decades.

For income seekers, this is where active ETFs can help. Here, managers can find better-yielding opportunities and potentially fight back the lower overall yield of the index. The low costs of active ETFs only enhance this yield potential further.

The S&P 500 has quickly become the benchmark for the entire stock market. Focusing on the largest 500 companies in the U.S., the venerable index is widely used by numerous investors big and small for their core positions and tracking the overall health of the U.S. economy. However, income investors may want to stop focusing on the S&P.

It turns out the yield on the benchmark is falling and is now at lows not seen since 2001.

Right now, adding up the dividend payments from the S&P 500 provides a paltry yield of 1.18%. That nearly hits the record low of 1.17% reached in February 2001. During the 2008-2009 financial crisis and Great Recession, the index was paying more than 4%.

You can see from this chart from the data website Multpl just how far the yield has fallen. The big outlier in the chart was the Great Depression. But you can see it has been a steady decline, picking up speed in recent years.

Source: Multpl

The question is why has the index started to pay lower and lower dividends? The answer could be summed up in one word: tech. Technology stocks have started to dominate the benchmark.

In the post-Great Recession world, tech stocks have become investor favorites with world-changing trends like cloud computing, mobile devices, e-commerce, and now artificial intelligence. As a result, more tech firms have started to grow and make their way into the index. And their pull on the S&P 500 is staggering. For example, NVIDIA (NVDA), Apple (AAPL), and Microsoft (MSFT) now make up 20% of the benchmark. Looking at technology as a whole, the sector makes up 32% of the index. That’s more than double the entire financial sector’s contribution to the S&P.

And while tech has been great for gains, it hasn’t been so great for dividends. In this case, it’s created a double-down effect on a lower yield.

For starters, higher stock prices and strong returns push down yields. The second piece that has quickly eroded dividends is the fact many tech stocks don’t pay them at all or pay very low amounts. The trio of NVDA, AAPL, and MSFT yield 0.03%, 0.5%, and 0.8%, respectively. They aren’t alone with low payouts. The Technology Select Sector SPDR ETF (XLK) —which tracks the tech stocks in the S&P 500—is currently paying just 0.61% with leading names like ServiceNow (NOW), Amazon (AMZN), and Adobe (ADBE) paying no dividends.

The pervasive idea is that many tech stocks hold onto their cash to help further growth or choose to do buybacks, as many industry insiders and VCs prefer to receive dividends.

For those looking for equity income, the lower yield on the S&P 500 has been terrible news on several fronts.

A big reason? Taxes. What we pay Uncle Sam on our dividends happens to be one of the most advantageous rates. The Bush-era tax cuts dropped this rate down to just 15% for most taxpayers. While long-term capital gains are taxed at this low amount, short-term gains are taxed at ordinary income rates, which can be as high as 37% for some investors. Moreover, some states enact taxes on gains but exclude dividends from the mix.

For those investors looking to extract cash from their portfolios on a steady basis, the lower yield on the index means they need to take more gains to make up their total returns. That could lead to some nasty tax surprises.

Second, the lower yield and lack of dividends provide less so-called cash cushion on the index and its returns. One of the benefits of dividends and dividend payers is that they can help limit losses and smooth out returns. By receiving 3% or 4% in cash before any other return, investors have a bit of a safety net. And, in bad years, dividends can help turn losses into gains. Because of the cash cushion, dividend stocks tend to be less volatile overall. The inclusion and rise of tech have only increased the overall volatility of the index.

Perhaps the biggest kick has been that the dividend growth of the index is starting to slip and pull down long-term averages. One of the biggest benefits of dividends over bond interest is that dividend payments can grow over time. But again, the fact that many tech stocks don’t pay dividends at all has started to affect dividend growth. Multpl again provides data with the S&P 500’s dividend growth through September at 5.90%. That is below its long-term average of 6.47% and well below the average 8.3% before the pandemic. Again, this is due to the preference of many tech names to focus on buybacks rather than dividends. ¹

For dividend seekers, the S&P 500 provides little comfort these days

So as a core position, the S&P 500 may not be a bad choice. But as a place to find strong dividend income, it’s becoming clear that the benchmark is no longer a contender. But that doesn’t mean that all the stocks within the index are losers on the dividend front. Quite the contrary, as there are numerous strong dividend stocks. They are just overshadowed by the low-yielding tech names.

One option is to be active in your approach.

The beauty of active management is they don’t have to follow the index. Here, managers looking strictly at income and dividends could avoid many of the low-yielding tech names to provide investors with higher yields.

Active ETFs can pay some interesting benefits as well on the tax and yield fronts.

By nature, ETFs are low-cost vehicles. Investors pay expenses directly out of gains and dividends. With lower expense ratios, investors get to keep more of their dividends and this results in a higher overall yield. The added win is that the creation redemption mechanism of ETFs prevents capital gains in the fund itself. In-kind transfers between authorized participants basically remove this headache from investors. Capital gains are only realized when investors choose to sell their shares.

With that, active dividend ETFs can be a powerful tool to avoid many of the low-paying tech stocks dominating the S&P 500 and dropping its overall income potential.

These ETFs were selected based on the exposure to dividend stocks with an active touch. They are sorted by their YTD total return, which ranges from 6% to 20%. They have expense ratios between 0.33% and 1.97% and assets under management of $8M to $7B. They are currently yielding between 1.5% and 12.6%.

In the end, technology stocks have been wonderful for capital gains, but not so much for dividend income. Their low payouts have continued to drive down the yield of the S&P 500. For income seekers, that means formulating a new plan that could thrive on active management and ETFs.

For income seekers, the S&P 500 has quickly become a dud. The growth and concentration of tech names have led to a falling yield on the index. But there are still many quality dividend names. For dividend seekers, the choice could be to use active ETFs to hone in on the market’s best bets.

¹ Multpl (December 2024). S&P 500 Dividend Growth