Dividends made a comeback in 2005. And it looks like the trend is here for the long term. After bottoming at 1.12% in March 2000, the yield on the stocks in the Standard & Poor's 500 has climbed to a recent 1.83%.
That's still far shy of the historical average yield of 3.92% for the period that began in 1925. But according to recent projections by Boston money manager Eaton Vance (EV), the trend toward higher dividends will run at least through 2010. The payout ratio -- the percentage of earnings a company pays out in dividends -- will rise during that period to 50% from today's 32%. To put that in context, the dividend payout ratio since 1936 has averaged 54%.
This swing of the pendulum from historic lows to something like the long-term average will do more than just put more dollars into the quarterly dividend checks that companies mail out. It will change market volatility, shift the relative desirability of stock sectors and amend the growth rate in the economy as a whole.Let's take a look at the difference this dividend comeback will make over the next five years.