Beyond the Headlines: The Overlooked Power of Dividends in Your Retirement

The late Jack Bogle, founder of Vanguard, once observed 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."

That wisdom is especially relevant for us to consider today. With the stock market near all-time highs, it’s easy to get caught up in the daily headlines about rising stock prices. But the true benefit of owning stocks has always come from two sources: the long-run growth in price and the dividends that great companies pay to their investors.

Right now, the environment can feel a bit confusing. The overall dividend yield for the S&P 500 is estimated to be just 1.3% over the next year, a near-historic low we haven’t seen since the dot-com bubble. At the same time, an uncertain interest rate environment can make it tricky to know how to position your portfolio for the income you need in retirement.

While dividends are often seen as the “boring” part of investing, especially compared to the high-flying stocks that grab all the attention, their role in your financial life shouldn't be overlooked. Let's talk about how to think about dividends and growth in today's market.

The Two Engines of Investment Return

Think of your portfolio’s return as coming from two different engines. One engine is capital appreciation—the growth in the price of your stocks over time. The other engine is dividends—the share of profits that companies pay out directly to you as a shareholder. For a smooth, long-term journey, you really want both engines working for you.

Historically, both have been critical. Since 1926, dividends have contributed about 31% of the S&P 500's total return, while capital appreciation made up the other 69%. As the "Growth of $1 Since 1926" chart shows, that combination has been incredibly powerful. Despite crashes, wars, and recessions, $1 invested in stocks in 1926 grew to around $18,000 by 2025.

However, the contribution from each "engine" isn't always the same. In some decades, like the 1940s and 1970s, dividends accounted for more than half of the market's total return. In others, like the 1990s tech boom, price appreciation did most of the work, and dividends accounted for as little as 14% of the return. The key has always been to stay invested and let both sources of return work for you over the long run.

Why Are Overall Yields Low Today?

The pattern of lower dividend yields for the broader market isn't new; it reflects a decades-long shift in business strategy. For much of the 20th century, investors bought stocks much like they might buy bonds today—primarily for the income they generated.

That began to change as investors and companies focused more on growth, particularly in the technology sector. Many high-growth companies choose to reinvest their profits back into the business to fuel further expansion rather than pay them out as dividends.

You can see this clearly in today's market. As the "Dividend Yields by Sector" chart illustrates, technology-related sectors have the lowest yields:

• Technology: 0.6%

• Consumer Discretionary: 0.7%

• Communication Services: 0.8%

In contrast, more traditional income-focused sectors still offer significantly higher yields:

• Energy: 3.8%

• Real Estate: 3.6%

• Utilities: 3.0%

This just highlights that while the overall market yield is low, there are still many companies paying healthy dividends. The challenge is to find the right ones.

Beyond High Yield: The Power of Dividend Growth

For those of us in or near retirement, it can be tempting to engage in "yield chasing"—simply buying the stocks with the highest dividend yields. But that can be a risky strategy. A very high yield can sometimes be a warning sign that a company is in trouble and may have to cut its dividend in the future.

Instead, I believe a more powerful approach is to focus on dividend growth. Think about it: a company that can increase its dividend payment year after year, for 25 consecutive years or more, is sending a powerful signal of its financial strength and management's confidence in the future. These companies, sometimes called "Dividend Aristocrats," are often mature, high-quality, blue-chip businesses.

A history of dividend growth demonstrates a company's ability to navigate different economic cycles, which is exactly the kind of stability and reliability you want to build your retirement income on.

Building a Portfolio for a Smoother Ride

Focusing on companies with a long track record of increasing their dividends has historically led to another key benefit: downside protection.

Retirement isn't about avoiding market downturns completely—that's impossible. It's about building a portfolio that can better withstand them. High-quality companies that consistently grow their dividends have often held up better during tough times. For example, the S&P 500 Dividend Aristocrats Index has historically outperformed the broader S&P 500 in about two-thirds of the months when the market posted a negative return. They have also tended to do so with lower overall volatility.

This is what building a financial "moat" is all about. By focusing on quality, you create a portfolio designed not just for growth, but for resilience.

The Bottom Line: It's All About Total Return

In retirement, you need your portfolio to do two jobs: provide you with income to live on today and continue growing to ensure your money lasts for decades to come. That’s why a total return approach is so important.

This means not focusing exclusively on high-dividend stocks or exclusively on high-growth stocks. It means building a durable, diversified portfolio that balances both. By anchoring your portfolio with high-quality companies that have a history of growing their dividends, you can create a reliable stream of income that also has the potential to grow over time, helping you keep pace with inflation.

While dividend yields may be low today, the timeless principle of owning great businesses and being rewarded with both dividends and growth remains the bedrock of successful long-term investing.