One of my favorite factoids as it relates to shareholder rewards is that 2025 was the fifth consecutive year in which S&P 500 member firms spent more on buybacks than they allocated to dividends. That despite the fact that the 1% excise tax on buybacks remains in effect.
Think about that for a moment. Companies are essentially paying Uncle Sam to repurchase their own shares, but they’re undaunted by it. That’s not an indictment of dividends per se, but coming of a lengthy run in which low- or no-yielding mega-cap growth stocks led the S&P 500, it’s understandable that many clients aren’t dividend-enthusiastic.
Such feelings are arguably pervasive among younger investors, broadly speaking. Many of Gen Z and even plenty of millennial investors fall into one of two camps: chasing capital appreciation via non-dividend growth stocks or “VOO and chill” – a reference to the Vanguard S&P 500 ETF (NYSE: VOO), which yields a microscopic 1.19%.
The point is many investors, and this pertains to a lot of age groups below baby boomers, are forsaking or ignoring dividends when they shouldn’t be. Advisors can help alter those perspectives for the better.
A Dividend Picture Worth 1,000 Words
Missions of conversion are difficult and there’s nothing inherently wrong with a client in their 20s or 30s being heavily exposed to the growth factor, but that doesn’t mean equity income should be ignored wholesale. The issue is many of these investors aren’t aware of the weight carried by dividends over extended holding periods.
(Image Courtesy: American Century)
As the graphic above details, reinvesting dividends over time pays, well, dividends. And guess who can afford to put the combination of dividend reinvestment and time to work for them? Gen Z and millennials. Conversely, many boomers may be using equity income to supplement other sources of retirement income, such as pensions or Social Security.
Something else many younger clients aren’t aware of are the fundamental benefits of the strongest dividend paying companies – sentiment that whether these market participants know it or not applies to some big-name tech outfits.
“Many dividend-paying stocks have tended to reflect companies with stronger fundamentals, such as ample free cash flow generation, savvy capital allocation strategies and durable business models,” observes American Century. “As a result, their stocks have generally tended to be less volatile.”
Dividends Are Wealth Builders
Not all young investors are mega-cap growth crazed and not all are chilling with VOO. According to my visits to various Reddit investing subs, plenty of young market participants worship at the altar of Warren Buffett.
That makes their relationship with dividends all the more quixotic because they tend to focus on the fact that Berkshire Hathaway (NYSE: BRK-B) doesn’t pay a dividend, thinking there’s some type of messaging in there from Buffett. All the while they’re ignoring that many Berkshire holdings, including “forever” names such as American Express (NYSE: AXP) and Coca-Cola (NYSE: KO), aren’t just dividend payers, they’re payout growth stories.
The point is dividends, particularly when reinvested, can be wealth creators.
(Image Courtesy: American Century)
Younger clients don’t need to be heavily allocated to sectors famous of big payouts and slow growth, but they should have some dividend exposure and they should understanding the potency of reinvesting those payouts.
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