Dividend yields for US stocks are nearing levels last seen a quarter century ago around the dot-com boom (and subsequent bust).

Put differently: The S&P’s dividend yield is very close to a record low.

The simple figure below, from Deutsche Bank, plots the equity benchmark’s payout with benchmark borrowing costs for the US government.

In the color accompanying the visual, the bank’s Jim Reid traced the history of the relationship, noting that prior to 1960, equity investors demanded more compensation in the form of regular, coupon-like payments to compensate them for the risks associated with stocks compared to obligations backed by the US government.

That began to change mid-century as the stock market matured and perceptions of relative risk changed to account for predictably robust corporate earnings and revenue streams which held up better in the face of inflation than bond returns. (Remember: Corporates operate in the nominal world, just ask 2021.)

As the chart makes clear, the onset of shareholder capitalism in the mid-1980s changed the game in earnest, and forever. As Deutsche recounted, “capital gains taxes were reduced and a new era of share buybacks began.” By the late 1990s, investors were just fine with companies plowing money back into the business in pursuit of growth rather than returning that cash to shareholders, who could anyway be placated with buybacks.

So… what? What’s the problem? Or, what’s the point? Well, the issue is that buybacks are great right up until a major downturn comes calling. As Reid put it, buybacks “can vanish overnight” in a recession, while dividends tend to be much more resilient given the often extreme market reaction to payout cuts. Your average stockholder’s not going to know if you buy back less shares. They will hear about it if you cut the dividend, though.

That’s the main risk from an equity market where buybacks are the preferred method of giving back to stockholders, but there are others. Buybacks can mask poor execution (i.e., bad management) by inflating earnings “artificially,” so to speak. And that’s to say nothing of the long-standing criticism that in the wrong hands, buybacks can be wielded to juice the C-suite’s equity-linked compensation at the expense of investment in R&D, equipment and (gasp) workers.

In February of 2023, Warren Buffett famously assailed the idea that buybacks are inherently bad, and although I didn’t (and don’t) disagree with his assessment, ol’ Warren, try as he did to account for the preponderance of scoundrels in the C-suite, failed in my judgment to take adequate account of the fact that not everybody can be trusted with the buyback button. In other words: Not every CEO is Warren Buffett.

Anyway, the concern right now, with the S&P’s dividend yield near record lows and the index at or near all-time highs thanks at least in part to a record-breaking pace of buyback authorizations (see here), is that in the event of a so-called “Wile E. Coyote” moment for the economy, the buybacks might dry up.

As long as companies “are flush with cash and happy to repurchase their own stock,” everything’s peachy, “but it does make the US market more high beta,” Reid said, in the same short note. “If a downturn hits, buybacks will stop far more quickly than dividends, potentially pulling away a key pillar of market support,” he went on. “In a crisis, the lack of durable income from dividends may matter more than markets currently appreciate.”