11 minDividends, a compass to navigate through uncertain times
For centuries, dividends were the measure of a stock's success. Yet the past four decades saw dividend investing fade into the background as cheap credit and rising valuations rewarded speculation over cash returns. As this era ends, a return to dividend-focused fundamentals may be at hand.
The Origins of a Groundbreaking Concept
In the seventeenth century, Run was the most talked about island in the world. It fails to make it onto maps nowadays, but at the time, this volcanic atoll located in present-day eastern Indonesia loomed large on copper-plate maps, its size disproportionate to its actual geography.
Nature had bestowed the island with a gift more precious than gold itself. Run, part of the islands known as the 'Spiceries' or Moluccas, was the world’s principal source of nutmeg - a luxury worth risking one’s life for. Nutmeg was believed to possess powerful medicinal properties, served as a preservative and flavoring, and was thought to cure the plague and increase sexual vitality.
Run became the epicenter of an intense competition among European nations for the control of the Spice Routes between Europe and Asia. This rivalry ushered in the Age of Great Explorers, when Columbus, Cabot, and Magellan - to name a few - set sail westward across the Atlantic, hoping to find a quicker route to the Spice Islands and break the Portuguese monopoly.
Excerpt from the 1753 'Map of Ceram, Ambon and the Banda Islands' focused on the Banda Islands, with a note in French stating: 'C'est dans ces Isles que croit la Muscade' ('It is on these Isles that the Nutmeg grows'). (Dutch National Library)
Indeed, the spice race truly began when the Portuguese rounded the Cape of Good Hope and sailed to India in 1498, establishing the first direct sea route from Europe to Asia. Until then, the trade had been controlled with an iron fist by Venetian merchants via the great trading emporium of Constantinople. Portugal's stronghold lasted roughly a century before the Dutch challenged this monopoly, distinguishing themselves in two crucial aspects: absolute brutality and financial innovation. It is the latter that concerns us here.
Anecdotally, well into the seventeenth century, Dutch sovereignty over Run was finally acknowledged by the English. In return, the English received what seemed an almost worthless consolation prize: a swampy island in the middle of what is now the Hudson River, which the Dutch had "bought" from Native Americans. The name of that island was Manhattan. A trade that would, in time, prove rather rewarding.
The Birth of Modern Finance
The Dutch East India Company, or Vereenigde Oost-Indische Compagnie (VOC), was born out of necessity in 1602 as the Dutch sought to eclipse the Portuguese as the dominant power in the spice trade. The VOC effectively became the first company to resemble modern publicly listed corporations, with capital divided into shares sold to the public. This structure enabled the company to raise unprecedented amounts of capital to finance the logistical challenges of long-distance trade. The foundation document of 1602 stipulated that investors could contribute 'as much as one wishes' regarding the minimum investment threshold.
A groundbreaking concept was then designed to reward investors: the regular distribution of profits from joint shipping ventures. To this day, the Dutch East India Company is credited with inventing dividends.
Shareholders collected their first dividend in 1610, though oddly enough, no cash was available. The dividend instead consisted of a combination of mace, pepper, and nutmeg - which proved rather impractical. Regardless, from that moment onward, dividends occupied a central role in modern corporate finance.
The Ascent of Dividends
For centuries, dividends were perceived as the ultimate measure of a stock's long-term success. In the absence of disclosure standards (the VOC never issued financial reports, for instance), dividends were the only form of returns and the only indication of a firm’s health. Share prices simply reflected the trajectory of dividends - a concept that may seem rather odd to most of us today.
My colleague Jérémie Fastnacht, Fund Manager of the BL Equities Dividend Fund, is quite fond of North American railway companies, which benefit from natural monopolies or duopolies in their field and pay generous dividends. Throughout the nineteenth century and well into the twentieth, railroads dominated the U.S. stock market. Moody's calculated a dividend available per mile of railroad. Even IPOs featured dividends - the Coca-Cola Company, for instance, paid its first dividend in 1920, merely one year after its listing.
‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in’. John D. Rockefeller
Falling Interest Rates and the Decline of Dividends
Shifting our focus to the present day, dividends certainly occupy a less prominent position. As of November 2025, approximately 40% of the S&P 500 Index constituents were either dividend-free or offered yields below 1%. The popularity of dividends has been receding since the 1980s, particularly in the U.S. stock market, which has drifted from a predominantly cash-based environment to one driven by short-term price movements.
S&P 500 dividend Yield & payout ratio
Source: NYU database, pages.stern.nyu.edu
The Long Arc of Falling Interest Rates
The past four decades have been unprecedented in the annals of modern financial history. A combination of powerful forces drove growth, chief among them the long arc of falling interest rates. Robust economic expansion and contained inflation - thanks to a surplus of resources (labour and raw materials), fiscal discipline (at least until 2008), and growing globalization following the fall of the Berlin Wall and China's accession to the WTO in 2001 - resulted in a persistently low interest rate environment. Unlimited access to cheap credit and monetary experimentation distorted incentives across economies. There is a strong case to be made that these forces have now unwound, fundamentally reshaping current beliefs and practices.
Most investors will not remember September 30, 1981, when the yield to maturity on the U.S. 10-year Treasury note hit its highest level since the creation of the Federal Reserve in 1913. This peak resulted from then-Chair Paul Volcker's determination to combat stagflation.
US 10-year Treasury yield.
Source: U.S. Department of Treasury, Macrobond
From 1981 until the end of 2021, inflation remained benign with very little volatility, and rates declined to extraordinarily low levels. In parallel, strong returns materialized in both equity and fixed income assets, importantly with negative correlation between them. This allowed investors to enjoy strong risk-adjusted returns in real terms. Risk tolerance naturally increased, and a more speculative mindset orbiting around share prices prevailed throughout this cycle. The impact of this unique and long-lasting low interest rate environment on investors and their relationship to stock ownership cannot be overstated. Forty years is a rather long time in the context of a professional career, and most investors below the age of 67 have only navigated a single interest rate regime. For most of us, the sharp rise in interest rates observed in 2022 was uncharted territory.
The Shift Back Towards Regionalisation
Today, the equation in financial markets has changed dramatically compared to four decades ago. We are witnessing a demographic shift toward aging populations, economic balkanization, surging debt levels, expansionary fiscal policies, resource deficits, and heightened geopolitical tensions. One might argue that slow-moving shifts such as demographics have limited immediate market impact (though demographics certainly contributed critically to growth rates during this extraordinary cycle). However, the simultaneous occurrence of all these secular trends implies a more uncertain outlook, with inflation likely to be somewhat higher and more volatile.
The political context has also evolved significantly since the 1980s. Thatcherism in the U.K. (1979) and Reaganomics in the U.S. (1981) were closely associated with trade and labor globalisation, as well as societal transformation resulting from market-based reforms. To some extent, Deng Xiaoping’s policies in China from 1978 also promoted market liberalism, albeit with "Chinese characteristics." The globalisation engine flourished as the Soviet Union dissolved and the Cold War ended, delivering very high returns. One major implication was the shift towards shareholder value. For corporations, powerful compensation schemes directly tied to stock prices rather than cash dividends were introduced. Fueled by declining interest rates, financial innovation emerged, and leverage became commonplace in financing large-scale hostile takeovers.
It is fair to say that this model has been challenged over the past few years. COVID, the rise of China, the current American administration, and the invasion of Ukraine have severely altered the prevailing liberal consensus. Global supply chains are being reshaped, and the pendulum is swinging back towards regionalisation. Moreover, U.S. hegemony and trust in global institutions - which clearly provided a supportive backdrop for financial markets, particularly the U.S. marke - are now being questioned. Net debt to GDP in the U.S. has reached levels similar to those of World War II (though this is a problem across G7 economies), which has become a salient concern in the current interest rate environment.
The Rise of the NASDAQ and Share Buybacks
The emergence of innovative technology-oriented companies has transformed the investment landscape since the 1980s and 1990s, when the NASDAQ came of age. This strongly contributed to changes in the stock market equation and the broader relationship to ownership. Being on the forefront of innovation, these young, large, and fast-growing companies typically invested most, if not all, of their profits in new growth and business expansion rather than paying regular income streams. Essentially, the NASDAQ has been a dividend-free zone for natural reasons. Instead, investors have been handsomely rewarded via price appreciation and abundant capital gains - the hallmark of Tech sector success.
Recently, however, several indicators point to the maturation of the technology sector, providing increased returns through dividend payments. Some mega-cap tech companies listed on the NASDAQ have begun initiating dividends and focusing on cash generation, thereby expanding the investable universe. Meta, Alphabet, and Booking.com notably introduced dividends in early 2024, joining peers such as Microsoft, Apple, and Oracle, which already maintain regular payouts. Granted, payout ratios remain fairly low, and most announcements were made in conjunction with much larger share buyback programs. Nevertheless, this represents an interesting trend.
A word on buybacks, which are fundamentally an alternative to dividends as a form of capital distribution. Buybacks have become hugely popular and a key component of the U.S. stock market since 1982, when a seemingly minor securities law change was enacted by the SEC. Rule 10b-18 effectively allowed companies to engage in open-market purchases of their own stock. By the late 1990s, buybacks had supplanted dividends. To some extent, buybacks have proven more flexible than dividends, as they can be used to disburse one-off cash windfalls and to tactically fine-tune capital structures to achieve specific leverage targets. Moreover, as investors’ focus shifted towards share prices over recent decades, corporations could use buybacks to inflate earnings per share (EPS) and stock prices.
However, stock buybacks have grown increasingly controversial over the years. Financial engineering and the low-rate environment have enticed corporations in many instances to finance buybacks with debt, thereby reinforcing financial fragility. Executive compensation linked to EPS targets can also lead managers to repurchase equity primarily to boost their pay. Effectively, buybacks can be a double-edged sword from investors' long-term perspective, whereas dividends - traditionally associated with mature business models - remain more reliable signals of financial health.
A Return to Fundamentals
In calm waters, every ship has a good captain. The past four decades have been extraordinary in many ways. Incentives across major economies were distorted, and dividends - absolutely central to financial markets throughout history - faded somewhat into the background from the 1980s onward. This did not happen in isolation but in conjunction with multiple forces that emerged almost simultaneously: a very low-rate environment, a surplus of resources (labour and raw materials), the rise of the NASDAQ, and more broadly an engine fueling globalisation that delivered strong returns for both equity and fixed income assets.
As the forces that drove growth during the previous cycle are now exhausted, and with a markedly different geopolitical and political landscape, investors must learn to navigate a more challenging and uncertain macroeconomic backdrop. The base case for the source of growth has fundamentally changed. Meanwhile, valuations across most asset classes remain elevated, and the probability is that real returns achieved over many decades will be much lower going forward. Markets seem more likely to be driven by real earnings rather than multiple expansion.
As investors navigate an environment marked by slowing growth, higher interest rates, and elevated geopolitical risks, a return to a more disciplined, cash-based investment relationship as part of one's core equity portfolio certainly makes sense. Dividend equities may well play an important role once again and account for a larger contribution to total market returns, similar to the 1940s, 1960s, and 1970s.
Dividends’ Contribution to Total Return Has Varied By Decade
S&P 500 Index Annualized Total Return by Decade (%)
As of 12/31/24. Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment. *Total return for the S&P 500 Index was negative for the 2000s. Dividends provided a 1.8% annualized return over the decade. For illustrative purposes only. Data Sources: Morningstar and Hartford Funds, 3/25.
History suggests that societies eventually pivot back towards more disciplined monetary policy after long periods of debt accumulation and financial excess. But such transitions are rarely smooth. Often, they coincide with social unrest, wealth distortion, political upheaval, and challenges to democratic values.
It is very likely that the real returns achieved over many decades will be much lower going forward, and investors should be less inclined to rely exclusively on capital gains and share price appreciation. In this context, dividend stocks present a useful tool to weather an environment of slowing economic growth. Shifts in paradigm are always difficult to identify from within. From an allocator's perspective, perhaps it is time to prepare for such an eventuality.
Written by Sébastien Gandon, Senior Client Portfolio Manager
BLI - Banque de Luxembourg Investments, a management company approved by the Luxembourg Financial Sector Supervisory Commission (CSSF)
Final date of drafting: 02/12/2025
Date of publication: 09/12/2025
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