If you've invested in stocks, you’ll know the urge to constantly check their prices to calibrate your portfolio’s overall returns. While price movements can be a key contributor to returns, many investors often overlook another important driver - dividends.
22 July 2025
For technical terms, please refer to our Glossary
What are dividends?
Dividends are a portion of a company’s profits distributed to shareholders, typically as cash payments or additional shares. For investors, dividends can offer an additional and steady source of income, often paid quarterly, though some companies may pay them monthly or annually.
Dividends can be shown as a fixed amount per share. For example, if a company pays 50 cents per share and you own 100 shares, you’ll receive $50. More commonly, dividends are expressed as a percentage of the share price — this is known as the dividend yield.
To calculate the dividend yield, divide the annual dividend by the share price. For instance, if a company pays $2 per share annually and the share price is $50, the dividend yield is 4%. This yield can help investors understand the return they’d be getting from dividends alone.
Why should I consider dividend stocks?
There are two key roles dividend stocks can play:
1. They could help you grow your income over time
Dividends have comprised 36% of total returns since 1926
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Past results are not a guarantee of future results. Invested capital at risk.
Sources: Capital Group, S&P Dow Jones Indices LLC. Data as of 31 December 2024. *Total return for the US S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualised return over the decade.
Over the long run, dividends have played a significant role in shaping total investment returns. Over the past near-century, dividends accounted for approximately 36% of the US S&P 500’s total return. This highlights how reinvested dividends can meaningfully compound wealth over time, especially when markets are volatile. Dividend contributions have remained a steady driver of returns across decades, reinforcing their importance in building resilient, income-generating portfolios for long-term investors.
2. They may provide a buffer against inflation and recession
Markets don’t move in a straight line—and in today’s environment, there’s no shortage of headwinds. High interest rates, persistent inflation, the end of central banks’ quantitative easing policies, and signs of slowing economic growth have all contributed to a more volatile investing landscape. In such environments, dividend-paying companies—particularly those with strong balance sheets and stable cash flows—have historically continued to distribute dividends. These regular payouts can serve as a steady component of total return, offering investors a degree of consistency even when broader markets fluctuate.
Not all dividend stocks are created equal
At Capital Group, our research team goes to great lengths to study the quality of dividends. Companies that consistently grow their dividends - dividend growers - have historically delivered stronger returns with lower volatility (price swings). Compared to dividend cutters and non-payers, dividend growers and payers have shown a more favourable balance of risk and return over the past three decades, reinforcing the value of quality and discipline in dividend strategies.
Dividend growers have outpaced the broader market
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Past results are not a guarantee of future results.
Sources: Compustat, Worldscope via FactSet, MSCI, Capital Group. Data from 31 December 1989 through to 31 December 2024. Returns for the global universe are total returns in USD (with gross dividends reinvested) calculated as a weighted average of regional portfolio allocations. The universe consists of an equal-weighted portfolio of the 1,000 largest companies in the S&P BMI Global Index for North America (50% weight), Europe (25%) and Japan (10%); and the 500 largest companies for Emerging Markets (10%) and Pacific ex Japan (5%) from December 1989 to December 2004. Thereafter, the universe consists of an equal-weighted portfolio of the 1,000 largest companies in the MSCI IMI (Investable Market Index) Indices for North America, Europe and Japan; and the 500 largest companies for Emerging Markets and Pacific ex Japan. The global universe is based on an approximate weighting of regions in the MSCI ACWI and does not reflect the changing regional shifts. The universe constituents were rebalanced (adjusted) quarterly, and volatility (standard deviation) is based on monthly returns. All companies composing the global universe are split into dividend payers and non-dividend payers. A company was classified as a “dividend payer” if it paid a dividend during the previous quarter. A company was classified as a “dividend grower” (a subset of payers) if its trailing 12-month dividend per share increased relative to one year earlier.
We group dividends by these distinctive characteristics:
1. Dividend compounders
These are companies that typically grow their dividend payouts over time. Being able to do that suggests that the company is profitable, has a stable cash flow and is confident in its prospects – positive traits for investors seeking resilient income and long-term growth.
2. Bond proxies
These companies typically offer higher-than-average yields but lower dividend growth. Typically operating in regulated industries with stable earnings and cash flows, they are sometimes viewed as ‘bond proxies’—offering consistent, income-like returns that resemble the steady interest payments of traditional bonds.
3. Cyclical beneficiaries
A cyclical company is a business whose performance and profitability are heavily influenced by the ups and downs of the overall economy. Investing in these companies towards the end of their down cycle may provide an opportunity to benefit from a recovery in earnings, dividends, and market value.
4. Dividend cutters
In the world of dividend stocks, these are the types of companies that investors aim to avoid. Essentially the opposite of dividend compounders, companies usually make dividend cuts because of financial challenges such as declining earnings or mounting debt.
Should investors just buy stocks with high dividends?
Not necessarily. While high dividend yields may seem attractive, they can sometimes signal trouble. If dividend payouts are set at an unsustainable level, companies may be compelled to reduce dividends in the future or even incur debt to sustain them, potentially jeopardising long-term growth.
It’s also worth noting that dividends aren’t guaranteed. Companies can reduce or suspend payments due to shifts in business conditions, profitability, or capital requirements. In some cases, dividends may even be paid out of capital rather than earnings, which may gradually erode the value of your investment.
That’s why it’s important to look beyond yield alone. Assessing the potential sustainability of a company’s dividend policy—especially in uncertain market environments—can help investors avoid potential pitfalls.
Instead of chasing high yields, consider focusing on companies with strong fundamentals: solid balance sheets, consistent earnings, and a proven track record of stable or growing dividends. This approach could help build a more resilient portfolio that supports both income and long-term growth goals.