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An examination of long-term equity returns reveals that an important part of the return comes directly from the dividend yield. In the last 10, 20, or even 30 years, the dividend yield has been around 2% annually for an index such as the S&P 500, independent of the total return obtained during the period. This observation leads us to a very practical conclusion: In a low-growth, low-return environment such as the one we will likely experience in the future, dividends will be a crucial part of total return. There are two questions that arise from this assumption. First, which countries around the globe have the highest dividend yield? And second, does a higher dividend yield necessarily mean a higher total return for investors?
To answer the first question, we calculated the difference between the total return and the price return for the major investable indices all over the world for the last 12 months (data as of October 31, 2011). The results are shown the table to the left.
As one can see, there are enormous differences between countries, with no real regional differentiation. We cannot say, for example, that emerging markets offer a higher dividend yield than developed ones. Look at the difference between the yield for Taiwan (3.8%) and Korea (1.3%), for example.
The answer to the second question--the relation between dividend yield and total return--is not so obvious. One could argue that if the dividend yield is an important part of the total return from a long-term perspective, then the higher-yielding markets should be the most profitable. But of course capital gains or losses can have an impact on the total return.
To see if there is a correlation between dividend yield and total return on a long-term basis, we have calculated the average yield and the total return of the major stock markets during two 10-year periods: from 1990 to 2000 and from 2000 to 2010. The average dividend yield for each of these two periods is simply the arithmetic average of the 10 annual dividend yields in the period.
The interesting conclusion (see graphs above, in which each point represents one country) is that, in general, the markets with higher yields have been the best performers during these two periods (returns have been calculated in USD). Therefore, investing with a dividend-yield criterion makes sense not only on an individual stock level but also on a country level--especially in the likelihood of a low-return environment in the future.
Fernando Luque is editor of Morningstar.es, the Spanish sister site of Morningstar.co.uk.
