Lack of Dividends Make Equity Indexed Annuities a Tough Sell

Dividends contributed five percent of the 7.9 percent total return from stocks over the 200 year period from 1802 through 2002.

Dividend paying stocks in the S&P 500 produced an average return of 8.92 percent since 1972.  Over that same roughly 40 year period, non-dividend paying stocks in the same index returned 1.83 percent.

Most equity indexed annuities only count market price gains in their reference index when crediting indexed annuity owners.  In other words, gains from dividends are typically excluded from the indexed annuity crediting process.

Granted, dividend yields are currently low by historic standards.  

That said, there is a current case to be made for the relative health of the larger, “blue chip” companies that are most likely to pay a dividend.

In addition, we currently live in a low return world.  Interest rates are at historic lows, equity price volatility is high, and most equity indexes have languished for the past decade plus.

All of these factors highlight the importance of dividends--not only from a yield and income perspective, but also from a total return standpoint.

These factors would also seem to highlight the difficulty of making a compelling case for equity indexed annuities.  

Assume, for example, that an equity indexed annuity has an 80 percent participation rate and excludes any gains from dividends in its reference indexes.  Next, assume that dividends contribute to 20 percent of total returns (low by historic standards).  In this case, the annuity owner would only receive 64 percent of the total index return.   

In any case, the importance of dividends means that most equity indexed annuity owners are leaving a good portion of any returns on the table.

Sources: Research Affiliates; New York Times