The stock goes up, the dividend yield goes down why is it happening?

It is likely that there is no investor in the capital market who does not know what indices are and does not know the 500 S&P index. Moreover, many invest in funds that mimic this index and also enjoy the nice yield it produces.

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J.P. Morgan's analysts write that the rate of growth in the profits of companies in the S&P 500 index is expected to jump this year (2024) to 10% after the previous year (2023) it was around zero. This should of course boost the index upwards.

By the way, an analysis of the S&P 500 index data over the past twenty-five years shows that since 1989 the index has risen at an annual rate of 12.3%. When you break down this increase into its components, you find that the companies' profits contributed 6.9% to the increase in the index. The expansion of the earnings multiple contributed 2.5% to the increase, while dividends contributed 2.3%.

dividends? Yes. Companies that distribute dividends give investors a "liquid" return in addition to the increase in the share price. This return translates into a portion of the total return. Perhaps it can be said that it hurts the value of the stock because the money goes out of the company and reduces its profit, but this is a mistake as I have already written here before and as could be seen in the research conducted by the Israel Stock Exchange. A study that proved that companies that distribute dividends over the years are also more profitable companies that bring investors a higher than average return.

In any case, we will return to the S&P 500 index and find that its dividend yield as of the end of the previous month and the end of the first quarter of 2024 was 1.35%, that is, much less than the average of the last half-year. Although it is true that this yield changes over the years depending on the performance of the companies, but in the last two years the average dividend yield of the S&P 500 index dropped from 1.82% to 1.35% and there is certainly a reason for this.

What is the reason? It could be presumed that the reason lies in the decrease in the profits of the companies. But the opposite is true. It is precisely the fact that the companies' profits increased that led to a decrease in the share of the dividend yield in the increase of the index. The explanation is very simple: if the profit increased and the company continued to pay the same amount of dividend, the portion of the dividend decreased.

Here's an example: Company X, whose stock trades at a million dollars, pays investors a dividend of $20,000 per year. That is, the dividend yield is two percent. But what happens when it trades for two million dollars? The dividend yield (which remains at $20,000) drops to a percent. So it turns out that the increase in the share price decreases the dividend yield. It is not sweeping and not for all the companies in the S&P 500 index, but it is certainly an interesting statistic to look at.

This is one reason for the decrease in dividend yield. There is another reason. The fact that the share of the giant companies has increased in the S&P 500 index and they hardly ever distribute a dividend, also contributes to reducing the weight of the dividend yield in the overall yield of this index.

So that you can see this in numbers, here is the dividend yield of the shares of the four largest companies in the S&P 500 index: Amazon – 0.0%; Google – 0.0%; Nvidia – 0.02%; Meta (Facebook) – 0.39%. So the index may rise this year, but it is not certain that the portion of the dividend yield will rise along with it. By the way, the lowest dividend yield ever recorded was 24 years ago, in the first quarter of 2000. At that time, this yield was only 1.12%.

Daniel Shabaks is the CEO of Hirshovitz Finance. The above should not be seen as investment advice, a recommendation or an opinion regarding the feasibility of investing in financial products of any kind and type.