The History of Dividends

When I began to focus on dividends for passive income around 2012, I thought that the concept of dividends had come about during the last century or so. Some clever CFO had devised a way to keep investors happy (and “invested”) by spreading the profits or whatever windfall a company may have. It turned out that I was off by several centuries.

So where did dividends come from, and how have they shaped the world of investing? Let’s dive into the history of dividends, from their origins centuries ago to their role in today’s markets.

The Origins of Dividends

The story of dividends begins in the early 1600s with the Dutch East India Company, often credited with paying the first recorded dividend. Founded in 1602, this trading giant issued shares to the public, raising funds to expand its global operations. By 1610, the company began distributing somewhat regular payments to shareholders, sourced from profits of its spice trade. These payments, much like modern dividends, rewarded investors for their trust and capital. This model - sharing profits with shareholders - set a precedent for companies worldwide.

As you can imagine since this was the 17th century, the Dutch East India Company’s dividends were not consistent at first. The payouts were tied to successful voyages and of course not every voyage was without losses or outright disasters. Over time, as the company stabilized, payments became more predictable, attracting wealthy investors seeking passive income.

This early system showed how dividends could align company and shareholder interests, a concept still central to investing today. According to Investopedia, the company’s dividends averaged about 18% annually over its 200-year run, a remarkable feat for the era.

Dividends Paid in Cloves and Cinnamon

I’ll move on through the centuries quickly but I thought I’d point out some interesting details about early dividends regarding how they were paid.

In the 1600s, when the Dutch East India Company was raking in profits from the spice trade, some dividends were actually paid in physical goods - namely nutmeg, cloves, cinnamon, and other highly valuable spices. These were commodities almost worth their weight in gold at the time, often used both for culinary purposes and as preservatives or medicine.

This practice wasn’t just symbolic - it reflected the company’s direct access to physical goods rather than hard cash. The logistical challenges of global trade meant that profits could arrive as barrels of spices long before silver coins. Shareholders, many of whom were Amsterdam merchants, could sell these goods directly in European markets, effectively realizing their returns in local currency.

The spice dividends highlight a time when the stock market was intimately tied to tangible global commerce, and dividends weren’t just numbers on a quarterly report - they were cargo.

Dividends in the Industrial Age

Fast forward to the 19th century, when the Industrial Revolution transformed economies. Railroads, steel, and manufacturing firms needed extreme amounts of capital to grow, and public companies emerged to meet this demand. In the United States, railroads like the Baltimore & Ohio began paying dividends in the 1830s, funded by freight and passenger revenues. These payments, often quarterly, attracted investors who saw dividends as a sign of financial health and a company’s progress.

In the United Kingdom, companies like the London and North Western Railway paid consistent dividends, sometimes yielding 5-7% annually, as noted by historical records. Dividends became a hallmark of stability, especially for utilities and infrastructure firms.

However, not all companies could sustain payments. Economic downturns, like the Panic of 1873, forced some to cut or suspend dividends during the 19th century, highlighting risks that persist today. If the history of investing has taught us anything throughout the centuries, it’s that there will be, almost guaranteed, times of economic turmoil.

The 20th Century: Dividends Go Mainstream

By the early 20th century, dividends were a cornerstone of investing. Large corporations, from General Electric to Procter & Gamble, used dividends and continue to use dividends to signal strength, often increasing payouts over decades becoming a favorite for income-focused investors. These “Dividend Aristocrats” - companies raising dividends for 25+ years - became investor rockstars.

The stock market crash of 1929 and the Great Depression tested dividend resilience. Many firms slashed payouts, but those maintaining dividends, like utility companies, gained public trust. Post-World War II, economic growth fueled dividend expansion. By the 1950s, U.S. companies in the S&P 500 often yielded 5-6%, per Yahoo Finance data, making stocks a go-to for retirees and institutions.

The Rise of Dividend ETFs

In the late 20th and early 21st centuries, dividend investing evolved with financial innovation. Exchange-traded funds (ETFs) like the Vanguard Dividend Appreciation ETF, launched in 2006, made it easy to own a basket of dividend-paying stocks. Platforms like Robinhood, Vanguard, Schwab, and M1 Finance offer access to these ETFs, simplifying diversification. Dividend ETFs focus on companies with strong payout histories, delivering yields of ~2-4% while spreading risk across sectors.

ETFs democratized dividend investing, letting small investors tap into income streams once reserved for the wealthy. They also introduced flexibility, as reinvested dividends could compound returns over time.

In recent years, there are more and more ETFs that are extremely aggressive and focus solely on creating income streams through dividend payments. Some of these have yields of 18% or more but require more explanation. I discuss these in articles throughout Everdend.com and how those ETFs are very different from what we historically consider a dividend paying company/stock.

FAQs

Let’s recap what we’ve gone over so far with some quick questions and answers…

Key Takeaways

The history of dividends spans centuries: From the Dutch East India Company to the dividend investors that benefited from the railroad tycoons of the 19th century to today’s Dividend Aristocrats and ETFs. Dividends offer income and growth potential, as seen in companies like Coca-Cola or funds like the Vanguard Dividend Appreciation ETF. Platforms like Robinhood, Vanguard, Schwab, and M1 Finance make dividend investing accessible to everyone, letting you explore this time-tested strategy.

In contrast to many of today's online passive income fads and strategies, dividend-paying investments stand out due to their extensive and reliable track record of benefiting investors that goes back hundreds of years. Dividend earnings are a time-tested, tried-and-true form of passive income.